The Annual Investment Allowance (“AIA”) allows businesses relief for qualifying capital assets in the year they are purchased up to the AIA limit.
After many years of tinkering with the AIA limit we have finally been promised a permanent rate of £200,000 from 1 January 2016.
This is welcome news, particularly considering the fact the AIA would have reduced to £25,000 from 1 January but for the alteration brought about in the Chancellor’s Summer Budget.
However, within the transitional rules lies a tax trap to be wary of for any business with a year end other than 31 December.
What is the impact?
The transitional rules will restrict the AIA relief for any assets purchased after 1 January 2016.
A taxpayer with a year end of 31 January 2016 would have an AIA for the a 12 month period of £475,000 made up of £458,333 for the 11 months to 31 December 2015 and £16,667 for the month of January 2016.
At first glance, you may reasonably expect that a business may spend £475,000 in the period ending 31 January 2016 regardless of the date of acquisition during that period.
Unfortunately, that would be incorrect and lead you into a potentially costly tax trap. From 1 January 2016 there is a restriction to 1/12th of £200,000 for each month after 1 January 2016.
That means a business that acquires an asset in January 2016 for £20,000 but bought nothing else in that year end will not get full relief.
That pattern continues for all months through 2016. For example, a February year end would be limited to £33,333 for acquisitions after 1 January 2016.
This will affect all purchases to which AIA may apply including but not limited to vans, machinery, computers, integral features within buildings and software.
What can I take away?
If your business is planning to make an acquisition during early 2016 and is concerned about the rules you should take advice now.
There are a number of measures that can be put in place to avoid falling into the trap. For more information on what can be done please get in touch with the team at Parkers Accountants and Chartered Tax Advisers today on 01254 366 366.