Changes to Tax Relief on Plant and Equipment

The Annual Investment Allowance (“AIA”) is a temporary tax allowance that provides 100% tax relief on the cost of plant and equipment purchased by a business in the year in which they acquire it. Currently, the AIA allows 100% tax relief on up to £500,000 of expenditure. This was due to be reduced to a figure of £25,000 with effect from 1 January 2016.

However, in the Budget, the Chancellor announced that the AIA will become permanent and will be set at a figure of £200,000 for expenditure incurred from 1 January 2016 onwards, rather than £25,000.

Where a business has an accounting period spanning 1 January 2016 there are complex transitional rules for calculating the maximum AIA for that period, which mean that calculating the AIA is not just a case of pro-rating the new and old limits.

Example:

Company has a year ending 31 March 2016.

Capital expenditure incurred of £250,000 in the 9 months to 31 December 2015 and £150,000 in the 3 months to 31 March 2016.

The total expenditure incurred for the year is £400,000 which is below the time apportioned maximum of £425,000 (£500,000 x 9/12 plus £200,000 x 3/12).

However, the AIA relating to the period from 1 January 2016 is restricted to an amount of £50,000 (£200,000 x 3/12) rather than the expenditure incurred in this three month period of £150,000. This reduces the AIA available from £400,000 to £300,000.

Businesses should take care when considering the timing of capital expenditure to ensure that the AIA is maximised.

The increase in the AIA emphasises the Government’s desire to encourage businesses to invest and expand. It also highlights the opportunities that are there already for businesses to gain substantial cash flow benefits by claiming tax relief that may have been missed on earlier capital expenditure as well as planning for new expenditure now.

This especially applies to expenditure incurred on commercial property where there may be tax relief available on fixtures and integral features contained in the building.

If you are considering incurring significant capital expenditure we would suggest that you contact us to enable us to advise you accordingly.