The Annual Investment Allowance is a tax break that began in 2008. It allows businesses to claim an immediate tax deduction for expenditure incurred on most types of fixed assets (cars are the most notable exclusion).
Without the Annual Investment Allowance it is normal to have to spread the tax deduction attributable to the asset over its life, so the AIA is a nice way to bring forward a tax deduction (it doesn’t impact the total deduction available over the life of the asset).
How to calculate the Annual Investment Allowance available in 2012
From 1 April 2012 the Annual Investment Allowance is set to decrease from £100,000 per annum to just £25,000 per annum.
Rather than a simple pro-rata calculation HMRC have made it complicated for companies that have a year end that straddles the date of 31st March 2012 (the majority of companies!). To make sense of it you have to think of two discrete periods. Using a 31 December year end as an example:
- Period 1: 1st January 2012 to 31 March 2012 – 3 months under £100,000 equating to £25,000.
- Period 2: 1 April 2012 to 31 December 2012 – 9 months under £25,000 equating to £18,750
If you spend £30,000 in period 2 you will only be able to claim a maximum of £18,750 for that period, if there is no spending in period 1 then this allowance will go to waste.
Similarly if you spend £30,000 in period 1 you will only be able to claim a maximum of £25,000 for that period and unless there is additional spending in period 2 the £18,750 allowed will go to waste.
Effectively you have two financial periods and are unable to transfer the allowance from one period to another.
Should you bring forward capital expenditure?
If you are anticipating to invest a sizeable amount of money in plant and machinery this year you should try to time your investments to maximise the tax saving in both periods. This might mean you want to bring forward planned capital expenditure into the first quarter of the year or delay some expenditure to after 31 March.
I appreciate this isn’t always practical but the tax saving might make it worthwhile.