This article appeared in Tolley's Practical Tax newsletter for tax practitioners ("Your fortnightly guide to the latest developments") 13 January 2012.
Most readers will be familiar with the capital allowances Annual Investment Allowance (AIA). To recap, it was introduced in April 2008 to replace the previous 40% first-year allowances for small and medium-sized enterprises.
The AIA is available to almost all businesses irrespective of their size or legal form. These include sole traders, partnerships (of which all the members are individuals), companies, registered friendly societies and certain bodies corporate that are not companies but are liable to corporation tax. The AIA is not available to trusts or mixed partnerships (ie, those in which a company is a member).
Virtually all plant and machinery qualifies for the AIA, up to the relevant thresholds described below. This includes fixtures, integral features (CAA 2001, s 33A) and long-life assets, but not (amongst others): cars, gifted plant, or expenditure incurred in the period when the qualifying activity is permanently discontinued.
Single companies receive a single AIA, but the AIA may be allocated in any way between group companies, companies that are related or under common control, or which have two or more similar qualifying activities (determined by reference to the ‘NACE’ international classification system).
The AIA gives an immediate 100% tax write-off for, currently, up to £100,000 of investment in plant and machinery in each year. It accelerates the relief that would otherwise be available, compared to conventional plant and machinery writing-down allowances.
The AIA does not have to be allocated in strict time order against the earliest expenditure on plant in the year. Expenditure up to the threshold may immediately be written-off in full in the tax computation, irrespective of when it was incurred during the year. Therefore, the AIA acts like a type of de minimis provision. Any excess expenditure is then sheltered from tax under the normal capital allowances rules, in either the 20% main pool or the 10% special rate pool for integral features and long-life assets etc. As the AIA may be used flexibly, it should first be allocated to expenditure that would otherwise qualify for the lowest rates of relief (for example, to integral features or long-life assets, rather than normal plant).
Originally, a maximum AIA of £50,000 was available. But this then became something of a political football.
Before the last election the Conservative party’s policy was to abolish the AIA. This was purportedly because in George Osborne’s words, in an interview with Andrew Marr broadcast on the BBC on 28 February 2010, the AIA was ‘… complicating the system and small businesses would rather have more money to make their own decisions on where they invest’. Or, put another way, it was because published Conservative party policy aspired to cutting rates of corporation tax ‘… funded by further reductions in capital allowances and scrapping [so-called] complex reliefs introduced by Gordon Brown’. So the aim was to reduce ‘headline’ tax rates, but do so by changing the calculation ‘small print’ to increase the taxable profits to which those rates applied – with businesses that invested in plant and machinery, in effect, subsidising taxpayers that did not.
The soon to be outgoing Chancellor, Alistair Darling, doubled the AIA to £100,000 from April 2010 (FA 2010, s 5(1)) – effectively daring the Conservatives to abolish a now even more valuable relief should they win the election.
In the event, a coalition formed the Government and any Conservative plans in respect of the AIA ended up being watered-down, with a delayed reduction to a maximum AIA of £25,000 from April 2012 (FA 2011, s 11).
The AIA is given for the ‘chargeable period’ in which the AIA qualifying expenditure is incurred (CAA 2001, s 51A(2)). For individuals this is the period for which accounts are drawn up, or failing that the standard tax year. For companies it is the accounting period. Therefore (as I am often asked), the AIA cannot be claimed for retrospective capital allowances claims. That is, those where the expenditure was incurred before April 2008 but the taxpayer is adding the capital allowances qualifying expenditure to the pool for a later period.
Where a taxpayer has a chargeable period which is less or more than twelve months, the maximum AIA is proportionally reduced or increased (CAA 2001, s 51A(6)).
The AIA is similarly time-apportioned where the period overlaps 1 April (corporation tax) or 6 April (income tax). Where the period comprises entire calendar months HMRC will accept that that the calculation may be made on either a daily or monthly basis, but in all other cases it must be based on the exact number of days (FA 2008, s 80(10)).
The maximum AIA is due to fall in 2012 to £25,000. The ‘relevant date’ is 1 April (corporation tax) or 6 April (income tax).
Taxpayers with a chargeable period that straddles this relevant date must split it into two separate periods (FA 2011, s 11(6)). However, the calculation is not as straightforward as merely working out how much of the relevant period falls before the date when the change occurs, and how much after, and then apportioning the old and new AIA limits.
In respect of expenditure actually incurred after the relevant date it is also necessary to restrict the maximum AIA after the change to a time-apportioned limit for that part of the chargeable period (FA 2011, s 11(7)). This is the way the rules worked when the AIA increased from £50,000 to £100,000 in respect of the expenditure incurred before the relevant date. However, because the AIA maximum is now reducing it presents more of a practical problem. This is best explained by two examples:
A company with a calendar year accounting period from 1 January to 31 December 2012 must split its period into two. The first period would run from 1 January to 31 March 2012 (ie, three months) when the maximum AIA was £100,000. The second would be from 1 April to 31 December 2012 (ie, nine months) when the maximum AIA was £25,000.
It would calculate its maximum AIA as follows:
Therefore, its maximum AIA for this chargeable period would be £43,647 (ie, £24,863 + £18,874).
However, the restriction in CAA 2001, s 11(7) must then be applied to the latter tranche of expenditure. If £40,000 was incurred on plant during the year, with £10,000 incurred before 1 April and £30,000 after, then the actual maximum AIA allowed would be only £28,874, ie:
Even though the total expenditure on plant of £40,000 is less than the combined maximum AIA of £43,647 it is not possible to shelter it all via the AIA. This is because there is insufficient expenditure before 1 April and s 11(7) limits the AIA for the later expenditure.
If the expenditure profile was reversed such that £30,000 had been spent before 1 April and £10,000 after then the problem would not arise and the full amount of expenditure could be sheltered by the AIA. The maximum AIA would be:
The calculation establishes the maximum AIA and there is no need to calculate separate ‘pre’ and ‘post’ AIAs and allocate each to the relevant expenditure. This could result in the apparent anomaly in the above example, where an ‘early’ expenditure AIA of £33,647 is available even though expenditure of only £30,000 was actually incurred before the relevant date.
Aside from the need to get this tricky calculation right in the tax computation, a planning point is that a business liable to income tax and expecting to incur more than £100,000 on plant in the twelve months to April 2012 could consider drawing up accounts to 5 April 2011.
There are rules and restrictions about changing accounting dates which are beyond the scope of this article and which would probably make it impractical for companies. For non-corporates a range of implications would need to be considered, not least the administration involved and reduced availability of capital allowances for the 2010/11 year of assessment. So this would not be suitable for all businesses. However, where it is feasible, it would permit £100,000 to qualify for the AIA in the year to 5 April 2012.
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