Annual Investment Allowance

Capital expenditure is not necessarily an allowable deduction in computing trade profits but it may attract capital allowances.  Capital allowances are treated as a trading expense and are deducted in arriving at taxable trade profits.

The Annual Investment Allowance (AIA) is available for expenditure on most plant and machinery, with certain exceptions.  In the last five years the AIA has varied from £25,000 to the current allowance of £500,000.  The chancellor had planned a reduction to £25,000 in January 2016 but he announced in June that the AIA will be reduced from £500,000 to £200,000.

While many businesses will not notice a practical difference as they do not spend over £200,000 on plant and machinery in a year, farming businesses spending over £200,000 will notice a difference in their tax liability.  The timing of a large purchase could have tax implications.

The allowance is apportioned and maximum allowances for the year, and the period from 1st January 2016 are shown below:

Using an example of an accounting period ending on 31st May 2016, if you were to spend £400,000 on new plant and machinery in the Autumn of 2015, you would be able to claim Capital Allowances of £375,000 to reduce your taxable profit.  If, however you waited until the Spring of 2016 to purchase the plant and machinery for £400,000, the maximum Capital Allowances you could claim to reduce your taxable profit would only be £83,333. The balance of the expenditure will secure writing down allowance at 18% in perpetuity.

Please note that purchases early in 2016 will have very limited allowances. This is worth considering carefully when Basic Payment Scheme payments are received.

If you are considering expenditure on plant and machinery, please do not hesitate to contact us to help ensure the timing of the expenditure is as advantageous as possible from a tax perspective.