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Transitional rules are the latest development surrounding the annual investment allowance.

The annual investment allowance (AIA) was introduced in 2008 to encourage businesses to invest in capital equipment. Under the regime, businesses may claim capital allowances of 100% of the expenditure incurred.

Since its introduction, the threshold has been increased and decreased and then increased again to its current limit of £250,000. The increased limit of £250,000 is intended to be for a two year period, for qualifying capital expenditure incurred in the period from 1 January 2013 to 31 December 2014, but who knows what future Budgets may bring.

The move is a welcome one for small businesses and, from the perspective of the economy, is intended to boost expenditure and increase growth. However, the fact that the allowance has yo-yoed so much means there are transitional rules which will, no doubt, cause some computational headaches for practitioners.

The AIA limit has changed several times since it was first introduced, as follows:

Date of expenditure Maximum AIA
   
01/04/2008 – 31/03/2010 for companies

06/04/2008 – 05/04/2010 for unincorporated business

 

£50,000

01/04/2010 – 31/03/2012 for companies

06/04/2010 – 05/04/2012 for unincorporated business

 

£100,000

01/04/2012 – 31/12/2012 for companies

06/04/2012 – 31/12/2012 for unincorporated business

 

£25,000

01/01/2013 – 31/12/2014 £250,000

Each change in the rate comes with its own set of complications and transitional rules.  We will look at some of these by way of example.

Example 1

Austra Ltd has a year end of 31 December 2012.  During that period, it incurs the following expenditure on qualifying plant and machinery:

  • 01/01/2012 – 31/03/2012                            £20,000
  • 01/04/2012 – 31/12/2012                            £20,000

Total                                                            £40,000

How much of the above expenditure will be eligible for AIA?

Methodology: 

  • It is necessary to time-apportion and look at the two component periods separately
  • For the period from 01/01/201231/03/2012, the limit will be £100,000 x 3/12 = £25,000
  • For the period from 0/04/2012 – 31/12/2012, the limit will be £25,000 x 9/12 = £18,750
  • The aggregate maximum for the period is therefore £25,000 + £18,750 = £43,750
  • Next, we need to consider how these interact
  • The legislation tells us that, for the period before the change, when considering the expenditure eligible for relief, you take the total of the two component periods
  • For the period after the change, the maximum AIA is restricted to the maximum AIA for the second component period only.

 

In our example therefore, the AIA due would be as follows:

Expenditure incurred before 01/04/2012

(Lower of £20,000 and £43,750)                                                          £20,000

Expenditure incurred after 31/03/2012

(Lowest of ((£43,750 – £20,000) AND £20,000 AND £18,750)      £18,750

Total AIA                                                                                                    £38,750

 
 

Let us now consider a company with a year-end that straddles the latest change on 31 December 2012 by way of an example.

Example 2

Django Ltd has a year end of 30 June 2013.  During that period, it incurs the following expenditure on qualifying plant and machinery:

  • 01/07/2012 – 31/12/2012              £20,000
  • 01/01/2013 – 31/06/2013            £150,000

Total                                                            £170,000

How much of the above expenditure will be eligible for AIA?

Methodology:  

  • Again, It is necessary to time-apportion and look at the two component periods separately
  • For the period from 01/07/201231/12/2012; the apportioned limit will be £25,000 x 6/12 = £12,500
  • For the period from 01/01/201331/06/2013, the apportioned limit will be £250,000 x 6/12 = £125,000
  • The aggregate maximum for the period is therefore £12,500 + £125,000 = £137,500
  • For the period from 01/07/2012 – 31/12/2012, the limit for the component period is the same as it would have been for the whole 12 month period had there been no increase in the limit, ie £25,000
  • For the period from 01/01/2013 – 31/06//2013, the limit is the total aggregate AIA limit for both periods minus any limit used up to 31/12/2012

In our example therefore, the AIA due would be as follows:

Expenditure incurred before 01/01/2013

(Lower of £25,000 and £20,000)                                               £20,000

Expenditure incurred after 31/12/2012                                         

(£137,500 – £20,000)                                                                  £117,500

Total AIA                                                                                        £137,500

 

We have also published an example of the interaction over the transitional period.

The interaction between these different components is considered in the following table:

  1 February 201231 March 2012 01 April 201231 December 2012 01 January 201331 March 2013

Total

Component AIA Limit £100,000 x 2/12

= £16,667

£25,000 x 9/12

=£18,750

£250,000 x 1/12

= £20,833

£56,250

Transitional limit (see Note) £16,667 (as above) +

£25,000 x 10/12 = £20,833

= £37,500

£25,000 x 10/12

= £20,833Less: excess used in previous period = (£16,667 – £20,000) = (£3,333)

= £16,667

Total of all component periods

= £56,250

Less:

Used in earlier periods=

(£20,000 +£16,667)

= £19,583

 
Amount spent £20,000 £25,000 £18,000 £63,000

AIA due

Lower of £37,500 and £20,000

= £20,000

Lower of

£16,667 and £25,000

= £16,667

Lower of

£19,583 and

£18,000

 

= £18,000

TOTAL AIA DUE =

£20,000 + £16,667 + £18,000 =

£54,667

Note: Transitional limit is the aggregate limit for the accounting period, disregarding the increase on 1 January 2013.

The ten-fold increase in the AIA limit is a welcome development for small businesses.  However, as can be seen from above, the changes do bring with it some computational headaches.

Article from ACCA In Practice