In his 2015 Summer Budget George Osbourne announced that from 1 January 2016 the Annual Investment Allowance (AIA – the amount of annual expenditure on qualifying plant and machinery for which a tax deduction can be claimed in full in the period of acquisition) is to be reduced from the current £500,000 allowance to £200,000. He also confirmed that the AIA would remain at this level for the remainder of his term in office.
Now for many businesses £200,000 is a lot of money and business owners may well think that the change will not affect them, however, where your accounting period straddles the 1 January 2016, the transitional rules can make your AIA disappear before your very eyes.
As the AIA is being reduced there are two transitional rules which determine the allocation of allowances available for purchases before and after the transition date. To illustrate by example, if your accounting year end is 31 January 2016 then the time apportioned annual allowance for that year is £458k for the 11 months to 31 December 2015 (being 11/12ths of the £500k AIA prior to 1 January 2016) and £17k for the month to 31 January 2016 (being 1/12th of the £200k AIA from 1 January 2016) giving a total allowance of £475k. This is still a large amount and is the maximum AIA that can be claimed in the year, but it only applies to acquisitions prior to 31 December 2015. For any acquisitions in January 2016 the maximum AIA that could be claimed is restricted to the apportioned allowance for that period, namely £17k!
Therefore if you were planning to make significant plant and machinery acquisitions in the New Year it is worth discussing this with us to see how this vanishing trick will affect you.