Why businesses should act now to maximise AIA tax savings
The Annual Investment Allowance for the calendar year 2019/2020 has increased to £1,000,000, but why should businesses act now?
First, let’s go back to basics. The Annual Investment Allowance, also known as the AIA, was introduced over ten years ago and is the amount of capital expenditure a business can undertake within a calendar year and claim the full tax allowance of the purchase in the year of acquisition.
Normal tax allowances for the purchase of capital equipment comes through Writing Down Allowances and the tax benefits are taken during the period of use on a reducing balance basis. It can, therefore, be very attractive for many businesses to offset the entire purchase price of an asset via an AIA.
The AIA made the financial news headlines during the Budget of November 2018 when Chancellor Philip Hammond announced that the allowance was being temporarily raised from £200,000 to £1,000,000 for the calendar years 2019 and 2020. This announcement was widely welcomed by businesses and many economists suggested the measure would provide a welcome boost to business investment.
In order to take advantage of the increased allowance, businesses need to consider a couple of factors:
- Are pre-tax profits sufficiently high to take full advantage of the increased allowance?
- When does their financial year end?
For any business with a financial year end other than 31 December, there will be a need to allocate the £1,000,000 allowance for 2019 on a pro rata basis. By way of example, a business with a year-end of 31 March will only be able to use £250,000 of the £1,000,000 in its current financial year. For such a business the total AIA available for its current financial year of 1 April 2018 to 31 March 2019 will be £400,000 which includes £150,000 from the £200,000 available in the calendar year 2018.
Many businesses will have 31 March 2019 as a financial year-end, and depending on their anticipated pre-tax profit, might wish to check how much of their £400,000 AIA is still available. Should they conclude that some allowance remains available and that they wish to take full advantage of such an allowance they will need to act fast to ensure that any capital equipment ordered can be delivered before 31 March 2019.
It is worth confirming that the AIA applies only to equipment purchased outright or subject to a hire purchase agreement, the latter being particularly attractive to a business that wants to take advantage of an immediate tax allowance but spread the cost of acquisition over a number of years.
Kubota Finance is not authorised to provide tax advice. You should consult an accountant in order to understand the tax consequences of any investment decision.