Useful guide from ACCA to changes in the recent autumn statement:
Ten things you need to know about the new annual investment allowance.
One of the headlines of the chancellor’s Autumn Statement was the increase in the Annual Investment Allowance (AIA) from £25,000 to £250,000 for two years commencing 1 January 2013.
- What is AIA? Annual Invest Allowance is effectively a 100% first-year allowance for business expenditure on qualifying plant or machinery.
- What are qualifying plant and machinery? Qualifying plant or machinery covers almost all assets a person may buy for the purposes of his business. The only business assets not covered are land, buildings and cars.
- Who can claim AIA? AIA can be claimed by an individual, a company and a partnership of which all the members are individuals, carrying on a qualifying activity. A qualifying activity includes trades, professions, vocations, ordinary property businesses and employments or offices. Trusts and partnership of which a company is a member do not fall within the definition of a qualifying person.
- What is the maximum AIA?
Maximum AIA is:
£250,000 on expenditure from 1 January 2013 to 31 December 2014
£25,000 on expenditure incurred from 6 April 2012 (1 April 2012 for corporation tax purposes) to 31 December 2012
£100,000 on expenditure incurred from 6 April 2011 (1 April 2011) to 5 April 2012 (31 March 2012)
maximum allowance is proportionately increased or reduced where the chargeable period is more than or less than a year.
- What happens if the accounting period straddles the affected dates? Transitional rules apply for chargeable periods which straddle the affected dates. For example a business with the year end 28 February 2013 would have three chargeable notional periods. The maximum AIA that this business would be eligible to claim on qualifying expenditure is £68,750 ((£100,000×1/12+£25,000×9/12+£250,000×2/12). However this amount is subject to an additional overriding rule for each notional chargeable period. The maximum allowance must be calculated as if the limit were for that national period. For more practical examples on maximum AIA please see our Guide To… AIAs [ADD LINK].
- What happens if the business spends more than AIA limit? Where businesses spend more than the annual limit, any additional expenditure is dealt with in the normal capital allowances regime, entering either the main rate or special rate pool, where it will attract writing-down allowances at the 18% or 8% rate respectively.
- Are there any other restrictions on AIA? Businesses under common control and group of companies are entitled to only one AIA. It is not available on assets not used immediately in the trade, or on a transaction with a connected person, or in the chargeable period in which the qualifying activity is permanently discontinued.
- What about expenditure on energy-saving plant and machinery? Investment in certain green technologies is eligible for enhanced capital allowances. These are in addition to the AIA allowance and, like the AIA, would be eligible for 100% tax relief in the first year.
- When is the expenditure treated as incurred? Capital expenditure is treated as incurred as soon as there is an unconditional obligation to pay, even if all or part of it is not required to be paid until some later date. However, expenditure is treated as incurred on a later date where any part of the expenditure is not required to be paid until a date more than four months after the date determined above.
- What is the economic impact? Increase in AIA should encourage small and medium size businesses to invest in plant and machinery, stimulating growth. For a higher rate taxpayer it would mean a 50% reduction of tax on any amount spent on qualifying equipment.
Annual Investment Allowance (AIA) is effectively a 100% first-year allowance for business expenditure on qualifying plant or machinery.
The general rule is that qualifying expenditure is
- expenditure on the provision of plant or machinery wholly or partly for the purposes of a qualifying activity that the person incurring the expenditure carries on, and
- as a result of incurring the expenditure the person incurring the expenditure owns the plant or machinery.
Plant or machinery covers many assets that a qualifying person may buy for the purposes of his business. Assets not covered by the AIA are land, buildings and cars. Typical examples of plant or machinery include:
- computers
- all kinds of office furniture and equipment
- vans, lorries, trucks, cranes and diggers
- ‘integral features’ of a building or structure
- other building fixtures, such as shop fittings, kitchen and bathroom fittings
- all kinds of business machines
- tractors, combine harvesters and other agricultural machinery
- gaming machines, amusement park rides
- computer aided machinery, including robotic machines
- wind turbines and fibre optic cabling.
‘Qualifying person’ means: an individual, a company and a partnership of which all the members are individuals, carrying on a qualifying activity. A qualifying activity includes trades, professions, vocations, ordinary property businesses and employments or offices. Trusts and partnership of which a company is a member do not fall within the definition of a qualifying person.
Where businesses spend more than the annual limit, any additional expenditure is dealt with in the normal capital allowances regime, entering either the main rate or special rate pool, where it will attract writing-down allowances at the 18% or 8% rate respectively.
AIA is not available
- on assets not used immediately in the trade
- in the chargeable period in which the qualifying activity is permanently discontinued
- on a transaction with a connected person.
Maximum AIA is:
- £250,000 on expenditure from 1 January 2013 to 31 December 2014
- £25,000 on expenditure incurred from 6 April 2012 (1 April 2012 for corporation tax purposes) to 31 December 2012
- £100,000 on expenditure incurred from 6 April 2011 (1 April 2011) to 5 April 2012 (31 March 2012).
Maximum allowance is proportionately increased or reduced where the chargeable period is more than or less than a year. Transitional rules apply for chargeable periods which straddle the affected dates.
The transitional rule operates as follows:
- The chargeable period is divided into separate chargeable periods, the first beginning on the first day of the actual chargeable period and ends on 5 April 2012(31 March 2012), the second begins on 6 April 2012(1 April 2012) and ends on 31 December 2012 (or the last day of the actual period if sooner) and the last one is 1 January 2013 and ends on the last day of the actual period.
- The maximum amount of each of the notional periods is then calculated and the sum of the amounts is taken as the maximum amount of the actual chargeable period.
- These rules are subject to an additional overriding rule for the expenditure incurred between 6 April 2012 and 31 December 2012. The amount cannot exceed the lower of £18,750 (£25,000×9/12) and the second notional chargeable period (if second chargeable period ends before 31 December 2012.).
Example 1
A Ltd draws up accounts each year to 31 January. In the year ended 31 January 2013 the company incurred AIA qualifying expenditure as follows: £20,000 on 1 February 2012, £30,000 on 1 July 2012 and £5,000 on 15 January 2013.
The overall maximum allowance for the accounting period is £56,250 ((£100,000×2/12+£25,000×9/12+£250,000×1/12). However for expenditure incurred on or after 1 April 2012 to 31 December 2012 the maximum allowance is £18,750. Accordingly, only £18,750 of the total of £30,000 expenditure incurred on 1 July 2012 qualifies for AIA. A Ltd is therefore entitled to claim annual investment allowance of just £42,750.
Example 2
B Ltd draws up accounts each year to 31 July. In the year ended 31 July 2012 the company incurred AIA qualifying expenditure as follow: £20,000 on 1 February 2012 and £30,000 on July 2012.
The overall maximum allowance for the accounting period is £75,000 (£100,000×8/12+£25,000×4/12). However, for expenditure incurred from 1 April 2012 to 31 July 2012 the maximum allowance must be calculated as if the limit were for that notional period £8,333 (£25,000×4/12). Accordingly, only £8,333 of the £30,000 expenditure incurred on 31 July 2012 qualifies for annual investment allowances. B Ltd is therefore entitled to claim AIA of £28,333.
The following provisions apply to restrict the amount of annual investment allowance
- groups of companies are entitled to only one AIA between them, but the companies can allocate the allowances between them as they think fit
- companies or groups of companies that are controlled by the same person and are related to one another are entitled to only one AIA
- if one person carries on two or more qualifying activities, he is entitled to only one AIA for the chargeable periods for those activities which end in the tax year
- if more than one person carries on the qualifying activities, they are between them entitled to only one AIA for chargeable periods for those activities which end in the tax year.