01 Oct 2019
The Annual Investment Allowance (AIA) is a form of tax relief for British businesses, designated for the purchase of business equipment. The AIA allows a business to deduct the total amount of qualifying capital expenditure up to a certain limit from its taxable profits in a given tax year.
In the 2018 Budget the Chancellor announced a temporary increase in the Annual Investment Allowance (AIA) from £200,000 to £1,000,000. However, timing is critical as it is scheduled to revert back to £200,000 on 1 January 2021.
The enhanced AIA of £1,000,000 is available for capital expenditure on plant, machinery and commercial vehicles (not cars) purchased between 1 January 2019 until 31 December 2020. This is an important tax incentive which accelerates the tax relief so that 100% of eligible expenditure can be offset against taxable profits in the first year, instead of taking up to 12 years to reclaim 90% of the original costs.
This is acting as a subsidy to encourage businesses to invest in plant and machinery by enabling savings of £1 in taxable profits for every £1 spent. The net benefit will depend on the rate of income tax or corporation tax the business pays.
Capital expenditure via a Hire Purchase (HP) agreement is also eligible for exactly the same AIA, in the same way as paying cash but with a cash flow advantage. Potentially your business could gain up to £1,000,000 in tax relief after only having paid the deposit. The interest charge is also 100% tax deductible.
All businesses can claim the AIA - the only exceptions are Mixed Partnerships or Trusts (i.e those in which a company is a member). If you have not already planned how to maximise the benefit please call us on 01482 228488.
The chart below illustrates the maximum amounts available with four examples, spending the right amount within the right periods in order to maximise tax benefits. Financial year ends straddling either the tax year or calendar year may result in complicated calculations that could result in a lesser AIA being granted. Given the lead times of some plant and machinery, from order to delivery, this also needs to be carefully factored in to your purchasing plans.