With just a few months to go until the Annual Investment Allowance falls to £25,000, Suzie Horne gets some tips for making the most of this valuable tax relief.
AIAs offer 100% tax relief on the full cost in the year the investment is made but advisers are very clear about how it should be used. They warn strongly against buying plant and equipment just to reduce tax.
However, if the spending is part of a planned and justified replacement or investment policy, then the relief can be used to help structure the investment in the most tax efficient manner.
The AIA drops from the current £100,000 a year to £25,000 next April, a steep fall which is making many business owners and managers examine their plans.
It will make sense for some to bring forward investment to use the higher allowances on offer in the current tax year.
“There is a danger that some people don’t claim everything they can,” says Rob Hitch, of Cumbria accountant Dodd & Co.
While machinery may be the obvious area of qualifying investment, many other elements of plant and equipment qualify but may be overlooked, he says.
For example, dairy equipment such as yokes, cubicles, mattresses, slats, troughs scrapers and lighting would all count as plant and can be claimed at 100%. Similarly, expenditure on assets such as slurry stores, silage pits, sheep handling equipment and potato coldstores will qualify.
In some cases the cost of getting planning permission and some professional fees associated with the plant and equipment elements of a project can also qualify under the AIA.
Where a building is integral to the installation of the plant, such as the housing for a new bulk tank for example, then the cost of the building too can qualify. This compares with the nil rate of relief normally available on agricultural buildings since the gradual abolition of the 4% annual buildings allowance introduced in 2008.
Mr Hitch is advising several dairy farms on bringing forward large capital projects such as milking parlours, slurry stores and slurry handling systems to benefit from the higher allowance in the current year.
“If they were going to be doing this next year anyway, it makes sense to bring it forward if this is possible but there are huge implications for the timing of the expenditure,” he warns. Each business must carefully calculate the amount of AIA to which it is entitled (see below).
While the timescale is very short until the AIA is cut to £25,000, careful planning is essential so that the allowance is maximised. This may literally mean going back to the drawing board to review projects so that plans, quotes and invoices are all clearly set out to identify different elements of an investment correctly so that full allowances may be claimed.
A careful review of completed projects not yet claimed for should also be conducted to ensure all expenditure is properly classified, says Mr Hitch.
Those using hire purchase to fund their plant and equipment also need to be particularly careful about when the assets are brought into use. To qualify for the AIA, anything bought using HP must be brought into use in the business in the accounting period in which it is to be claimed.
This has implications for all investments but most likely to be caught out by this are purchases of large seasonal machinery such as forage harvesters, combines and potato or sugar beet equipment where there may be a time lag between purchase and first use in the business.
Renewable energy equipment is likely to qualify for 100% AIA and installation cost is also likely to qualify, says Mr Hitch.
Investment allowance factbox
• Annual Investment Allowance is the amount which a business can invest in plant and equipment in an accounting year and set 100% of that investment against income in the same year
• AIA is currently £100,000 a year (tax year 2011-12) but drops to £25,000 from next April
• Where the accounting period of a business does not coincide with the tax year then the AIA is calculated pro-rata to reflect allowances for the relevant tax years
• Mixed partnerships which have both individuals and companies as members of the partnership, are only eligible for one AIA across the group. This is to prevent joint ventures and machinery syndicates from benefiting twice from the AIA if they are controlled by connected persons
• If using Hire Purchase as funding, make sure the investment is brought into use in the accounting period in which the AIA is being claimed, otherwise it will not be available
• Apart from machinery, many other purchases qualify for 100% AIA as plant and equipment – in some cases this can cover associated planning fees, building costs and professional fees
• Assess all expenditure to make sure it is properly classified.
Making a date with the AIA – check your entitlements
Understanding accounting dates and how they relate to AIA is important in achieving a full claim. For those whose year ends coincide with the tax year ends of 31 March (for companies) and 5 April (sole traders and partnerships), things are straightforward in that the AIA amounts available at 100% relief also cover the same period.
However, for those whose accounting years straddle two tax years, things are more complicated – their entitlement to AIA is calculated on a pro-rata basis.
For example, a sole trader or partnership with a 30 June year end is currently entitled to relief on £75,000, representing three quarters of the current £100,000 AIA and one quarter of the £25,000 AIA due to come into force from next April.
This is because the accounting year of this business covers nine months of trading when the £100,000 rate is effective and three months at the new lower rate from 6 April 2012. This gives this business a total AIA 100% allowance of £81,250 in its accounting year to 30 June 2012.
This business and others with the same year end will only qualify for 100% relief on £6,250 of any expenditure between 6 April 2012 and 30 June – ie on one quarter of the £25,000 AIA ceiling available for the 2012-13 tax year.
However it could spend both the £6,250 and £75,000 in the first nine months of the tax year to 5 April 2012, meaning relief would be available on £81,250 of expenditure in that period.