Annual Investment Allowance (AIA) allows you to deduct the full value of a qualifying item from your profits before tax and can be claimed on most plant and machinery up to the AIA amount.
From January 2019, the allowance was increased from £200k to £1m, therefore businesses purchasing plant and machinery should consider the allowance and the timing of claims.
I was recently speaking with an arable farming client who grows a substantial area of potatoes and the topic of AIA came into discussion. Due to good cereal and potato prices and yields, which were more substantial than he had anticipated in the middle of the dry summer, his profits for the year to 31 March 2019 could be between £500k and £600k. Some of the client’s tractors and potato equipment needed to be replaced and he was keen to take advantage of the increased AIA threshold. He enquired if spending £600k on new equipment between 1 January 2019 and 31 March 2019 would eliminate his taxable profit, which would mostly be chargeable at tax rates of 40%.
On further discussion he told me the cost of the new equipment was £600k and he was to gain £100k from trade-ins. He had also bought a tractor at a cost of £50k in May 2018.
Unfortunately it isn’t as simple as spending £600k to eliminate £600k profit from tax. Firstly he needed to consider the level of AIA available to the partnership. This is calculated as:
|1 April – 31 December 2018 £200k x 9/12||£150k|
|1 Jan – 31 March 2019 £1m x 3/12||£250k|
|Total AIA available||£400k|
The client’s gross expenditure on plant and machinery in the year to March 2019 would be £50k on the new tractor plus £600k on the new plant. He would also have plant disposals of £100k for the trade-ins. This meant there was no pool of unclaimed allowances brought forward.
His maximum capital allowances claim would be:
|Qualifying for AIA||(£400k)||£400k|
|Writing Down Allowances (WDA) x 18%||(£27k)||£27k|
|Pool carried forward||£123k|
Although the proposed purchases would make a big dent, they wouldn’t eliminate projected profits entirely.
AIA can only be claimed in the period that you bought the item and if the AIA has changed in the period you’re claiming for, then you need to adjust the amount you can claim. Timing of capital expenditure and your accounting year end needs to be carefully considered to maximise claims during the two year window where AIA is £1m.
For further information or to discuss making an AIA claim, contact:
01738 441 888 | 01224 623 111
The information in this blog should not be regarded as financial advice. This is based on our understanding in February 2019. Laws and tax rules may change in the future.
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