Less than three months left at higher AIA rate
UK top 20 Chartered Accountants Saffery Champness is warning farm businesses that little more than two months remain with the Annual Investment Allowance set at the higher level of £500,000. Come 31 December that drops to £200,000 as announced by the Chancellor in his summer budget.
The AIA allows businesses to deduct the full value of an item from profits before tax providing the item qualifies as plant or machinery for AIA.
David Chismon, Director with the Landed Estates and Rural Business Group at UK top 20 Chartered Accountants Saffery Champness says:
The AIA is a mechanism by which the Chancellor can encourage investment by businesses in expensive capital items or for integral features in buildings or structures. Capital allowances can apply to everything from computers to combines, although, for sole traders and partners, for items that are used part of the time outside the business then only the business proportion of the capital allowance can be claimed.
The amount of relief will vary where the AIA reduces during an accounting period, so it can lead to a nasty trap if money is spent in the wrong period. The rules are difficult to explain in the abstract so an example may help.
Taking a business with its year end at 31 March 2016 it would be eligible for a maximum AIA of £425,000 over the whole year; being 9/12ths at the current, higher rate to end December, ie £375,000 plus £50,000 at the lower rate for the three months to 31 March 2016.
However the timing trap occurs if expenditure is incurred after 1 January 2016 as that expenditure would only qualify for AIA to the extent of £50,000, whereas if the same expenditure was incurred before 31 December the AIA rate would be £425,000.
This situation could provide a real incentive to ensure plant and machinery is purchased in the right period if maximising capital allowances is important to your tax position.