The Annual Investment Allowance – an important timing opportunity to save tax
The Annual Investment Allowance
Many readers will know that expenditure on capital assets can attract a tax allowance called an “Annual Investment Allowance” which effectively writes off the cost of the assets at 100% in year one. So if you buy a van for £20,000 the allowance is £20,000 and therefore your taxable profit is reduced by £20,000. This could save a lot of tax depending on your tax rate. A company might save up to £4,000, a sole trader or partnership may save anything up to £9,000. The Annual Investment Allowance applies to the total value of all qualifying assets; the limit doesn’t apply to each asset.
At the moment there is an upper limit on the amount of the Annual Investment Allowance that you can claim. Are you sitting down? Good. The maximum is £500,000 – that’s right, a cool ½ a million quid. If you spend up to £500,000 on qualifying assets then you can reduce your taxable profits by the same figure. Please remember that you won’t save £500,000 of tax, but a percentage of that amount based on the rate of tax your business pays. Think of it the other way – if your profits were £500,000 you wouldn’t expect or want to pay tax of £ 500,000 would you? Of course not.
The Annual Investment Allowance was introduced in 2008 with limits that started at £50,000 and have risen and fallen over time to vary between £25,000 and the current £500,000 limit.
On 1st January 2016 the limit drops to £ 25,000.
Therefore from 1st January 2016 if a business has qualifying expenditure exceeding £ 25,000 only the first £ 25,000 will attract tax relief at 100%, the remainder at only 18% and therefore the cost of the asset will never be fully written off over time.
There is therefore a need to plan your capital expenditure over the forthcoming 13 months. Put simply, if your plans are to spend more than £25,000 on qualifying assets the advice has to be to do it before 31 December 2015 rather than after. It doesn’t matter whether your financial year-end is 30 September 2015, 31 December 2015 or 31 March 2016, the expenditure must be incurred before 31 December 2015.
For some businesses the £ 25,000 limit is still going to be adequate for their needs and therefore this change will not affect those businesses, but for others it will only buy a van and little else, in this case the excess over that £25,000 cap will only attract tax relief at 18% and it is these businesses that need to take action.
There is another consideration that businesses should consider, but this is a general principal rather than one specific to the changes to the Annual Investment Allowance. This principal is that if you need to invest in an asset it is better to incur that expenditure before your financial year-end rather than just after it. Why? Let us assume a business year-end of 31 March 2015 and a business is going to incur qualifying costs of say £10,000. If the business incurs this cost on or before 31 March 2015 the tax relief is given in the 2014/15 tax year. However, if the expenditure was incurred on 15 April 2015 the tax relief is given in the nexttax year and therefore the tax relief is given about a year later. You can see that a delay of two weeks can delay the tax relief by a year – in an extreme case, a delay of just one day can delay the tax relief by a year,
So please review your capital expenditure plans and if you feel that you might be caught by this timing trap, please contact me.