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Higher investment allowance will require careful planning

Suzie Horne 12 December 2012
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Very careful planning and timing are needed to get the most from the increase in annual investment allowance (AIA) announced by the chancellor in his Autumn Statement.

From 1 January 2013, businesses will be able to spend up to £250,000 a year on plant and machinery and set the whole of the expense against their income in the same tax year.

The AIA is currently at £25,000 a year, having been reduced from £100,000 since 6 April.

However, the allowance is allocated according to the accounting year of the business, not the tax year, and must be carefully used to avoid being caught out, warn advisers.

For example, many farms have a 31 March or a 5 April year end, giving nine months of AIA at £25,000 a year (£18,750) and three months at £250,000 (£62,500). This gives a combined AIA of up to £81,250 for their current year.

However, a business with a financial year from 1 March 2012 to 28 February 2013 will have to account for three different AIA limits, as the period from 1 March to 5 April 2012 will also give it one month at the £100,000 annual rate of AIA.

“While the old adage of not letting the tax tail wag the dog still holds true, farmers need to have a serious look at the timing of expenditure during the next year to maximise this relief,” said Rob Coote, head of Bidwells accounting services.

“As always, there are other factors to take into account before deciding on the purchase date.”

While machinery is an obvious candidate for AIA, there are many other eligible investments, such as electrical fittings, conveyors, grain drying floors, tanks, feeders, mats and polytunnels. Renewables and diversification may also qualify.

For those considering using the extra allowances available from 1 January, decisions were going to have to be made quickly, said Graham Page of accountant Ensors. Buyers would also need to be certain of getting the machinery on farm in time.

There would also be those who had ordered machinery and who now wanted to make use of the new rate of AIA. “A lot of people will be talking to their dealers to negotiate a deal to change the delivery date,” said Mr Page.

AIA pitfalls

  • Timing is important – check that you have allocated the correct amount of AIA pro-rata for your accounting period
  • Method of purchase affects ability to claim – if financed with cash or loan, date of delivery of the plant and equipment is the effective date for AIA
  • If using hire purchase (HP), then the date on which the machine is brought into use in the business is generally the effective date for AIA
  • Due to a quirk, HP purchases can be used to straddle two years’ AIA and claim the whole of a large purchase such as a combine, by paying a deposit in one AIA period and making the remaining payments in the following AIA period
  • Those operating as a partnership with a company as member of the partnership cannot claim AIA

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