Following the recent budget, businesses can now invest up to £500,000 as their annual investment allowance (AIA), up until 31 December 2015. It will then return to a limit of £25,000.
What is the AIA?
The AIA is a type of capital allowance. It offers tax relief at 100% on expenditure on plant and machinery (which qualifies) in the year of purchase. The maximum you can deduct from your taxable profits is increasing from £250,000 to £500,000, up until the end of next year.
As the temporarily increased limit up until April 2014 has been £250,000, any investments spanning the two differing allowance limits will involve pro rata calculations to determine the blended limit across the period of investment.
Businesses can claim the AIA on their expenditure on plant or machinery. This investment can extend well beyond manufacturing plant, machinery or new IT. It could include, for example, optical equipment, ophthalmic instruments and dental practice equipment required by many of our recent clients.
Who can apply for AIA?
Any business entity can claim providing their activity satisfies one of these criteria: trading; commercial property letting; office or employment; or leasing. The only business structures not eligible for the AIA are mixed partnerships and trustees.
Does the size of my opticians practice matter?
Current law allows opticians to take advantage of this government measure regardless of the size of their business. The allowance can be used for both general and ‘special rate’ plant and machinery. There are exceptions, the main one relating to the expenditure on cars (Section 38B of the Capital Allowances Act 2001).
The AIA is a 100% upfront allowance. When businesses spend more than the annual limits any additional qualifying expenditure will attract relief under the normal capital allowances regime.
Why have the government made these changes?
The changes are intended to stimulate business investment in the economy and bring about cash flow benefits intended to help small and medium-sized businesses in particular.
What restrictions are there?
If a business with several related interests has been split into a group of companies, these subsidiaries would only get £250,000 between them in total as an allowance.
Do repairs or replacements of assets qualify?
Spending on repairs or replacements is normally an allowable deduction against income and so full tax relief is given immediately. The costs of repair or replacement in the last 12 months greater than half of the total cost of replacing an asset entirely, then spending is treated as capital expenditure.
So if your business spent £5000 in the last 12 months repairing part of your air conditioning system, and the total cost of replacing the system was £8000, then the £5000 would be treated as capital expenditure and qualify for allowances at 10%.
This increase creates the chance to save up to 50p in taxable profits for every £1 a company has invested in new equipment.