Press release: Annual Investment Allowance increase welcome news for business, but timing complexity could defy its logic
The Association of Taxation Technicians (ATT) has welcomed the Chancellor’s announcement of an increase in the Annual Investment Allowance (AIA) to £200,000. However, the charity has warned that businesses could be very confused about what the change means in practical terms.
The AIA enables businesses1 to claim tax relief on the whole of their qualifying capital expenditure in the year of expenditure. The limit has fluctuated significantly recently, with a current temporary limit of £500,000 which, before today’s announcement, was expected to plummet to the normal statutory limit £25,000.
However, while the increase is good news, the normal arithmetical adjustments which result are surprisingly complex and create a pitfall for the unwary. The ATT is urging the government to support their stated intention of giving businesses incentive and certainty in their investments by removing that pitfall.
President of the ATT, Natalie Miller, said:
“We strongly welcome the permanent increase in the AIA ; which will reassure businesses by providing certainty about their capital allowances. Our concern now is to make the mechanics of the change as simple as possible. The rules2 mean that a business with a year end of 31 March 20163 which had incurred no other qualifying capital expenditure in that year would have an effective AIA limit of £425,0004 if it incurred all its qualifying expenditure for that year at any time up to 31 December 2015, but only £50,0005 if it incurred the same expenditure at any time over the first three months of 2016. Only by deferring expenditure into its financial year commencing on 1 April 2016 would it have an actual AIA limit of £200,000.
“We think that the logic of the Chancellor’s decision would be best implemented by a simple measure to ensure that any business that had not spent the full amount on which it could have received AIA if it had incurred the expenditure before 1 January 2016 would be entitled to AIA on any expenditure in the remainder of its straddling period6 to the extent that it did not exceed the difference between the new £200,000 limit and what it had actually incurred in the part of that period up to 31 December 20157. This would have the effect of making AIA available on the new full £200,000 regardless of when the expenditure was incurred within the straddling period. It would eliminate the further yo-yoing in the AIA limit.
“Without our suggested simplification measure, many businesses (other than those with a 31 December year end) will have to try to fix the timing their capital expenditure for tax reasons rather than the more appropriate commercial reasons. What we are recommending should not impact the tax ‘take’; it simply removes an unnecessary timing complexity which will otherwise be a concern for business and impose an unwelcome additional policing responsibility on HMRC.”
Notes for editors
1. The AIA is available to all trading businesses regardless of their structure so it applies equally for limited companies, LLPs, partnerships and sole traders.
2. The note published today by HMRC indicates how it is envisaged that the change will work; see here.
3. 31 March is a common year end for businesses. For a business with a year end of 31 January 2016 or 29 February 2016, the effective limit for expenditure after 31 December 2015 would be even lower (£16,667 or £33,333 respectively in round terms).
4. The £425,000 figure is the sum of nine months of the £500,000 limit and three months of the new £200,000 limit.
5. The £50,000 figure represents three months of a £200,000 annual limit.
6. The existing legislation refers to any accounts year of a business which includes but does not end on 31 December 2015 as a straddling period and effectively treats the parts of the period before and after that date as distinct.
7. As a simple example of how our suggested measure would work, if a business with a year end of 31 March 2016 had incurred £45,000 of qualifying expenditure up to 31 December 2015, it would be entitled to AIA on up to a further £155,000 (being £200,000 minus £45,000) on expenditure incurred in the three months to 31 March 2016. Without the suggested measure, the AIA limit on such post 31 December 2015 expenditure would be £50,000 (see Note 4 above).
Technical Team