New Annual Investment Allowance (AIA)
HMRC are proposing a change to the way in which you can write off purchases of plant and equipment for tax purposes.
The change is likely to be introduced for companies on 1 April 2008, and for sole traders and partnerships 6 April 2008.
Presently small companies and enterprises can write off 50% of qualifying expenditure on plant and equipment against their taxable profits in the year in which the expenditure is made - any balance of expenditure brought forward or carried forward will then qualify for a writing down allowance. Medium sized businesses are restricted to a 40% initial or first year allowance.
From April next year the 50% and 40% first year allowances will be replaced with a 100% annual investment allowance for capital purchases in any one year of up to £50,000.
Obviously this will benefit certain firms and disadvantage others. If you have the ability to claim a 50% first year allowance on all your plant and equipment expenditure and this is changed to a 100% allowance on expenditure up to £50,000, you will be worse off if your expenditure exceeds the break even figure.
The breakeven figure for "Small" firms is £100,000 - if you spend more than this you will qualify for less tax relief post April 2008. The equivalent breakeven figure for "Medium sized" firms is £125,000.
Please note the following factors which also need to be taken into account:
- Qualifying plant and equipment expenditure does not include Motor Cars.
- If your company is part of a group, the group will have the £50,000 annual investment allowance which individual group members will have to share.
- Where a company has associated companies, companies under common control, each associated company will have its own £50,000 allowance.
- It is likely that HMRC will include anti-avoidance clauses to stop fragmentation of businesses to try and qualify for multiple AIA's.
- It is unlikely that the introduction of the AIA will affect the other 100% tax allowances - for instance the 100% Business Property Renovation Allowance.
- On 6 April 2008 it is also predicted that the annual writing down allowance for plant and equipment will be reduced from the current 25% to 20% per annum. This writing down allowance is applied to the written down value of equipment brought forward from earlier tax years.
A note of caution - businesses may be encouraged by this annual investment allowance to make investment decisions purely on a tax basis. Even if you are a sole trader or partner paying tax at 40%, a £50,000 payment for equipment to save £20,000 in higher rate tax should only be made if there are compelling commercial reasons for the investment, as well as compelling tax reasons. Otherwise you may be draining £30,000 of working capital (and cash flow) from your business to buy an asset that may make very little contribution to future increases in profitability.
At present this change is based on the issue of a HMRC consultative document. It is likely that the legal framework will be included in next year's Budget. We will need to monitor progress and will advise clients accordingly.