1 September 2015 | Taxation
At present the Annual Investment Allowance is £500,000, but it is due to be cut to £25,000 from 1 January 2016. Is there a possible way to legally increase your claim?
As you probably know, the annual investment allowance (AIA) is a tax break that means you can claim the full cost of equipment against your business profits in a single year and not having it spread over decades as would otherwise be the case. But changes to the maximum AIA you can claim are planned at the end of 2015.
As things stand the AIA is set to fall to just £25,000 from 1 January 2016. There might be a reprieve, at least partly, because HMRC is carrying out a review of the AIA for the government. However, there’s no guarantee of the outcome; as HMRC is famously stingy it might pay you to make the most of the AIA at its current level.
Tip: By committing yourself to a purchase of equipment by 31 December 2015 you’ll ensure that the current AIA limit of £500,000 applies.
If you create an obligation to buy equipment, usually by signing a document such as a purchase order, this counts as the relevant date for AIA purposes. The date you pay isn’t usually a reason. For example, if you sign a contract to buy equipment costing £60,000, on 31 December 2015, the AIA can be claimed on the whole cost as long as you haven’t already used it on other purchases.
Trap: Where payment is made more than four months after the contract, the relevant date for the AIA is the date payment is actually made. In the case of an HP agreement the relevant date is when you start to use the equipment in your business. You need to keep these two points in mind if you intend to make purchases near the end of the 2015 calendar year.
Of course your plans or finances might not allow you to make a purchase before the current AIA
Example: James and Jack own a garage and their business plan calls for them to buy new equipment in their company’s next financial year which starts on 1 April 2016. They intend to spend £50,000. If the AIA is cut to £25,000 from 1 January 2016 they’11 have to wait decades for tax relief on half the cost of the new equipment.
Tip: Subject to anti-avoidance rules, a business can be split into two or more parts and each will be entitled to a full AIA. So in our example James and Jack could set up a partnership and hive off part of their business to that and claim AIA on up to £50,000, i.e. £25,000 per business.
The AIA anti-avoidance rules say that two or more companies that share resources and are under common control, i.e. the same shareholders control both, must share a single AIA. Also, a partnership where one of the partners is a company can’t claim AIA. In our example James’ and Jack’s two businesses aren’t both companies and neither does their new partnership include their existing company That means the anti-avoidance rules don’t bite and they can double up on the AIA.
The information provided is for general information purposes only.
Legislation and details may have changed since this was written. The text may not include all matters that are relevant to your individual situation.
You should not make decisions, or refrain from making decisions, without taking further professional advice about your specific circumstances.
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