One of the most eye-catching proposals in Philip Hammond’s Budget was that the Annual Investment Allowance would increase from its current level of £200,000 to £1,000,000 for the calendar year 2019 and 2020.
The Annual Investment Allowance (AIA) is the amount of capital equipment a business can purchase and be able to claim all related tax benefits in the year the assets were purchased.
The effect is to bring immediate tax relief on capital expenditure that would otherwise take many years to recover and as such it has acted as a powerful incentive for businesses looking to bring forward investment decisions.
So what difference will it make?
Firstly, to benefit from £1,000,000 of potential tax relief a business must be making a pre-tax profit of at least £1,000,000, so many SMEs will not be able to take the full benefit of the extra allowance.
For larger businesses that are looking to reduce their short-term tax liability, the new allowance should stimulate investment. It is worth repeating that the allowances apply both to equipment purchased outright and equipment subject to Hire Purchase agreements with the latter giving businesses immediate tax relief whilst spreading the cost of acquisition over an agreed period, typically between 2 and 7 years.
Question: Should businesses rush to purchase equipment before 31st December 2018?
Over recent years there has been something of a scramble for some businesses to get equipment ordered and delivered by the end of December to ensure that they do not lose any unused allowance, so with AIA increasing to £1,000,000 from January, will this year be different?
Answer: This mostly depends on the date of the financial year end for the business concerned.
Whilst the AIA is allocated by calendar year (January to December), the ability of a business to maximise tax saving will depend on how much qualifying investment is made in its financial year. A business will have to allocate next year’s £1,000,000 allowance according to its own financial year.
So if a business has a year end of 31 December 2019, the calculation is straight forward as the financial year and AIA cover identical timescales and the business will have the full £1,000,000 allowance available for immediate tax relief.
For a business with a financial year end of 31 March 2019, only three months (£250,000) of next year’s allowance will be available for immediate tax relief, with the remaining nine months (£750,000) of the 2019 allowance allocated to the next financial year.
In summary, is there a need for a business to take advantage of any unused 2018 AIA before 31st December?
The answer will depend on:
- How much AIA is available for their current financial year?
By way of example, a business with a year end of 31 March 2019 will have:
- Nine months of the 2018 allowance (£150,000)
- Plus three months of the 2019 allowance £250,000)
- Total allowance £400,000 for the remainder of their financial year
- Is the business making a taxable profit that exceeds the AIA available for its financial year?
- How much of the 2018 AIA has been used so far?
Using the above example (year end 31 March 2019) and assuming that taxable profits will exceed £400,000, there might be a need to use any outstanding 2018 AIA if the cost of all equipment being acquired before April 2019 exceeds £250,000.
In such cases a degree of urgency will need to be applied to ensure that any equipment subject to the 2018 allowance is on site before the end of this December.
For any business that wishes to take full advantage of their available AIA but avoid an immediate cash outlay, a Hire Purchase agreement is the ideal solution.
Written by Steve Moody, Managing Director of CPF ltd.
For more information about AIA and how it effects your business call Steve and his team at CPF on 02382352506
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