Plan investment carefully to maximise tax relief

Businesses with a year end other than 5 April need to plan capital investment particularly carefully to get the most from the Annual Investment Allowance.

This currently enables them to claim 100% tax relief on the first £100,000 of investment in the current tax year.

Farming businesses often have a year end other than 5 April and need to be aware how the change in allowances works for them, says Julie Butler of accountants Butler & Co, Hampshire.

For example in the current tax year, a company with a 31 December 2010 year end will be able to claim three months’ allowance at the £50,000 a year rate to cover the period from 1 January 2010 to 31 March 2010 and nine months’ allowance pro rata at the £100,000 a year rate of AIA. This gives the company a maximum AIA of £87,500 in the 2010/11 tax year.

“It’s really important to realise how the timing works because if you are planning to re invest, that allowance rate is only there until your year end, you cannot get it back,” warns Mrs Butler.

Understanding how to make the best use of and allocate AIA at the different rates is particularly important as the allowance is being cut to £25,000 from April 2012 (31 March for companies).

The limit was increased from £50,000 in the Budget last March and applies to expenditure incurred on or after 1 April 2010 for corporation tax purposes and 6 April 2010 for sole traders and partnerships.