Capital Allowances - the new Annual Investment Allowance
The Government has recently published its response to consultations on changes to the way in which relief will be given for expenditure on plant and machinery.
This is just a brief reminder of the anomalies in 2008 of the new ‘annual investment allowance’ (AIA). This will be introduced in April to provide for a 100% allowance on the first £50,000 of expenditure on plant and machinery (other than cars) and replace the existing first-year allowances for small and medium-sized enterprises.
The AIA will apply to expenditure incurred on or after 1 April 2008 for corporation tax (6 April 2008 for income tax). The same dates see the abolition of first year allowances. Where an accounting period overlaps the implementation dates the maximum AIA will be restricted according to the proportion of the period falling after the relevant date. This will give some strange results in the coming months.
As an example:
A business with a 30 April year end plans to buy plant costing £50,000. If it buys in March it will qualify for a first year allowance (FYA) of 50% = £25,000. The same acquisition in May (the first month of the next accounting period) will attract the full AIA = £50,000. The real problem is if the same acquisition were to be made in April when it would attract no FYA, the AIA will be restricted to one twelfth of the annual amount (£4,167) and the excess will attract a reduced writing down allowance of 24.58%, giving a total deduction of only £15,433.
Identical transactions will be taxed differently according to the date expenditure is incurred and the accounting date chosen!
Careful planning is very important.
Dear Mercer & Hole,
Thank you for your useful example of the new AIA rules. However, whilst I understand the restriction of the allowance for the period from 1st to 30th April 2008 could you please explain how the reduced WDA of 24.58% is calculated?
Thank you for your assistance.
Yours sincerely,
David Fraser
David
For periods that straddle 1 April 2008 the WDA is calculated at 25% for the period before April 2008 and at 20% thereafter. So in the example of a company with a 30 April 2008 year end the WDA is 25% times 335/365 days plus 20% times 30/365 days = 24.58%.
Thanks
Cathy
What happens to the capital allowance pool brought forward from the previous year. Does that continue to get 25%?
And what happens to the expenditure on plant and machinery over the £50k allowance. How is that treated?
Helen
In general on plant and machinery etc from April WDA's will be at the rate appropriate to the pool irrespective of when the plant was bought. On new spend, the excess over £50,000 will go to the appropriate pool.
Thanks
Cathy
Dear Mercer & Hole,
What about Furniture and fittings?
Are they qualify for AIA, or they will be only allowed for WDA- 20%.
Rayn
Any qualifying capital costs other than cars can be used to take up the AIA entitlement. Where integral fixtures are involved it would probably be more sensible to utilise the AIA against these costs (that would otherwise qualify for only 10% allowances) rather than other plant (that would attract a rate of allowances of 20%).
Thanks
Cathy
Would light and medium weight vans up to 6500ks qualify for AIA?
Peter
Yes - all assets except cars potentially qualify for AIA
Thanks
Cathy
I'm a newly created Sole Trader who plans to do his own accounts. But I am confused as to how eg the purchase of a computer worth £1000 is handled regarding tax and the AIA. Do I merely have to count this as a declared part of the AIA (ie as a tax-deductible allowance from profits), or does the purchase also have to figure somewhere on the + side as it is part of the business? Many thanks
Keith
The purchase of the computer is a capital cost and will be reflected in the balance sheet as opposed to the profit and loss account. It will not therefore be a deduction from profits for accounts purposes. The cost should however attract a 100% deduction against taxable profits under the AIA. This of course assumes that the computer is used exclusively for your new business. If there is any private use then the allowance will be restricted.
Thanks
Cathy