The March 2014 Budget announced a temporary increase in Annual Investment Allowance (AIA) from £250,000 to £500,000, though it is scheduled to revert back to £250,000 on 1 January 2016.
The enhanced AIA of £500,000 is available for capital expenditure on plant, machinery and commercial vehicles (not cars) purchased from April 2014 until 31 December 2015.
This important tax incentive accelerates the tax relief, so that 100% of eligible expenditure can be offset against taxable profits in the first year, instead of taking up to 12 years to reclaim 90% of the original cost using the normal 18% annual writing-down allowance.
In effect for every £1 spent, the Government will give you £1 back in the form of relief against your taxable profits. The net benefit will depend on the rate of income tax or corporation tax that your business pays – which could be between 20% and 45%. It is the equivalent of a subsidy to encourage businesses to invest in plant, machinery and commercial vehicles.
Capital expenditure via a Hire Purchase (HP) agreement is also eligible for exactly the same AIA, just as if you had paid cash, but you will also gain a terrific cashflow advantage. Potentially your business could gain up to £500,000 in tax relief after only having paid the deposit, and the interest charged is also 100% tax deductible.
Almost all businesses can claim the AIA, the only exceptions being Mixed Partnerships or Trusts (ie those in which a company is a member). If you have not already planned how to maximise the benefit, speak to your accountant or finance director now.
Timing is critical
Proper advice is needed because different financial years, that straddle either the tax year or calendar year end, may result in complicated calculations that could result in a lesser AIA being granted in that financial year. The chart below illustrates the maximum amounts available by showing four different financial year end companies, demonstrating how vital it is to spend the right amount within the right periods in order to maximise the tax benefits.
For financial years ending in 2014 and 2015 the maximum AIA actually available may be lower than the amounts indicated in the chart, depending on the timing of the expenditure. Given the lead times of some vehicles and equipment, from order to delivery, this also needs to be factored in to your buying plans.
Get the timing or the amounts wrong and your business could either miss out on available tax relief or, worst still, end up paying far more tax then is required.
Other factors being equal, if your business is contemplating purchasing commercial vehicles in the near future, there are some strong tax-based and cash flow arguments to carefully plan purchases before the end of your financial year and certainly before 1 January 2016, so that you can maximise on the available £500,000 tax relief.
JCB Finance provides asset finance for UK businesses for plant, commercial vehicles and cars, but it is not a tax or financial advisor.
Companies should always seek advice from their own accountant or finance director, as every business’ circumstances are different.