Guest column: Buying machinery? Make sure you time it right…

In this guest column, local accountancy firm Burgis and Bullock write about the Annual Investment Allowance

The Annual Investment Allowance (AIA) allows businesses to claim tax relief for expenditure on capital items in the year of purchase rather than spreading relief over a period of time.

The allowance currently sits at £500,000 but was due to reduce to £25,000 from 1 January 2016. One of the Chancellor’s more welcome announcements in the summer budget was the news that the AIA will be £200,000 from January 2016 and that this level will remain constant (presumably for this parliament at least). 

The transitional rules that apply for businesses that have accounting periods that span the rate-change are complex and therefore it is important to understand how this change will affect relief for capital expenditure over the interim period. Note that these changes could already restrict relief for expenditure incurred today and can affect a standalone business spending less than £20,000. However, for those businesses considering investing in capital items during their current accounting year, it may be more advantageous to purchase sooner rather than later.

The complexity arises as the AIA is apportioned over a business’ period of account, and this affects the level of relief available for expenditure both before and after the rate change.

For example, a company that has a 31 March 2016 year end will have a total AIA of £425,000 for the accounting year, however the maximum relief for expenditure in the period 1 January-31 March 2016 is £50,000. In this same scenario, if a capital purchase is made for £500,000 in November 2015, the maximum allowance will be restricted to £425,000, even though the expenditure took place well before the reduced AIA comes into force.

With this in mind, it may be important to plan the timing of expenditure on capital items.  The table below details the maximum AIA available based on the business year end, together with the maximum expenditure that can be incurred in the period from 1 January until the year end. 

As can be seen from the above table, the timing of capital purchases may be critical to maximising the tax relief available. It is therefore important to keep this in mind if you are thinking of purchasing capital items in the near future.

The above is a guide only and you should take professional advice relevant to your circumstances prior to acting.  No responsibility for loss occasioned to any person acting or refraining from acting as a result of the above article can be accepted by us.

Burgis & Bullock is a forward thinking regional accountancy practice for all your tax and accounting needs and can be contacted on 0845 177 5500 or via our website www.burgisbullock.com.