Investing in plant or machinery?

Why it might be a good idea to bring forward your purchasing plans…

In a measure designed to stimulate business investment, the Annual Investment Allowance (AIA) was further increased in the Budget 2014 to £500,000.

This meant that businesses investing in purchases of qualifying plant or machinery, such as machinery, vans or computer equipment, could benefit from an increasing level of tax relief against their purchase.

We explain how the Annual Investment Allowance could benefit your business and why time might be running out to take advantage of this generous tax relief.

Annual Investment Allowance the basics…

The AIA provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses.

Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance of only 18% or 8% depending on the type of asset.

The maximum amount of the AIA was increased from £25,000 to £250,000 for the period from 1 January 2013 to 31 December 2014. This was then further increased to £500,000 from 1 April 2014 for companies or 6 April 2014 for unincorporated businesses until 31 December 2015. The AIA will return to £25,000 after this date.

Where a business has an accounting period that spans either the operative date of the increase to £500,000 on 1 (or 6) April 2014, or the operative date of the reversion to £25,000 on 1 January 2016, transitional rules will apply (see examples below).

Annual Investment Allowance – How long have I got?

In the Budget 2014 announcement, the AIA limit was increased to £500,000, until 31 December 2015 when, unless otherwise announced, it will return to its previous level of just £25,000.

“Therefore, if you are planning a significant purchase of plant or machinery, you might consider bringing it forward at least into this calendar year to ensure that you can benefit from this relief before it potentially returns to £25,000 or is scrapped under a different Government policy.”

How does the Annual Investment Allowance work?

1. An example if your purchase falls in an accounting period spanning the increase to £500,000

For example a single company with a 12 month accounting period to 31 December 2014 could obtain overall relief for the period of £437,500 (£250,000 x 3/12 plus £500,000 x 9/12). There is a restriction of £250,000 for expenditure incurred in that part of the accounting period which falls before 1 April 2014.

2. An example if your purchase falls in an accounting period spanning the increase to £500,000

A company with a 12 month accounting period from 1 April 2015 to 31 March 2016 would calculate its maximum AIA entitlement based on: (a) the proportion of the period from 1 April 2015 to 31 December 2015, that is, 9/12 x £500,000 = £375,000; and (b) the proportion of the period from 1 January 2016 to 31 March 2016, that is 3/12 x £25,000 = £6,250.

The company’s maximum AIA for this transitional chargeable period would therefore be the total of (a) + (b) = £375,000 + £6,250 = £381,250, although in relation to (b) (the part period falling on or after 1 January 2016) no more than £6,250 of the company’s actual expenditure in that part period would be covered by its transitional AIA entitlement.

Our tip: For companies it is easy to calculate on the monthly basis as the changes take place from 1 April, however for self employed or partnerships where 6 April is the cut-off it may be easier to pro rata using days.

What could qualify under the Annual Investment Allowance?

Investments in plant and machinery such as the following could qualify:

  • Computers and 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, such as printing presses, lathes and tooling machines
  • Tractors, combine harvesters and other agricultural machinery
  • Gaming machines, amusement park rides
  • Computerised /computer aided machinery, including robotic machines
  • Wind turbines and fibre optic cabling.

 “The potentially radical reduction in the AIA is a strong sign that the government are looking at restricting the level of current allowances to compensate for the reductions in corporation tax rates which are coming into play.”

“This leaves us with the question, will we see the total removal of the AIA in the coming years in favour of the return of the temporary first year allowances? We shall but wait to see and are advising clients to maximise their use of AIA while it remains available.”