George’s big plan to get us investing in the future
It’s not often that the powers that be see fit to give companies a generous tax break, but it sometimes happens. Announced last year and in effect January 2013-15 all companies can now purchase £250,000 of business assets for use in the business, and receive full tax relief that year.
This is a 10-fold increase on what was previously allowable, and the most that has ever been “on offer” as it were to be used by businesses investing in their assets. George Osborne is being criticised left right and centre for not “prioritising growth” and whilst I have no intention of playing politics, this single change was probably the highlight of the Autumn Statement and looks to me to be a far more substantial effort than the previous government’s attempt at boosting investment amongst businesses.
The increased AIA is a chance for businesses to tax effectively upgrade their systems, purchase new equipment/ machinery or invest in their environment, as well aiming to simultaneously help support suppliers and manufacturers. Maybe you are a manufacturing company looking to update some machinery and tooling, or a service organisation that supplies such tangible or intangible assets. Both should hope to benefit from these changes either through a lower tax bill this year after purchasing, or increased orders selling them.
What do you need to know?
The AIA is a form of capital allowance, which offers tax relief at 100 per cent on all qualifying expenditure in the year of purchase. The maximum you can deduct from your taxable profits for your company (or group) is now set to be £250,000. This is pro-rated for long or short periods, and also for periods that span the dates the various rates of allowance run over.
That sounds like a catch
Like death and taxes, you can be sure that tax rules come with small print. This increased allowance is being phased in, and for at least the remainder of 2013 the amount claimable will depend on the date your accounts are made up to.
Being April, our clients with January and February year ends are now looking to us to assist preparing their accounts and advise them of their tax liability. Let’s consider a February case. This company will straddle one month of the £100,000 limit ending March 2012, nine months of the £25,000 limit ending December 2012 and two months of the new £250,000 limit.
1 month to 31 March 2012 £100,000 x 1/12 = £8,333
9 months to 31 December 2012 £25,000 x 9/12 = £18,750
2 months to 31 December 2012 £250,000 x 2/12 = £41,667
So let’s assume you’ve spent £100,000 on one particular project in summer 2012. How much relief do you get?
All £68,750 from your pool? Wrong
£18,750, the middle date range? Wrong
£8,333 + £18,750 = £27,083? Wrong
Its £22,917 obviously! Let me explain…
The legislation includes a paragraph explaining that relief is capped at “the amount that would have been the maximum allowance for the period beginning on the 1/6 April 2012 and ending at the end of the straddling period if that period had been a separate chargeable period and the increase to £250,000 had not taken place”
So we are forced to calculate the relief for the 11 month period 31/03/12 – 28/02/13 imagining the increase never took place to arrive at a figure of £22,917. Somebody forgot the mantra “tax doesn’t have to be taxing” when they came up with that.
So when should I invest?
The message is clear that the timing of any plant acquisitions which are currently planned should be considered very carefully. If you are looking to sign off on a significant purchase you would be wise to consider the above, and compare the tax effect of delaying until after your year-end if possible. It’s too late for our example February year end client now, but if you draw accounts up to April and hold off until May, you would receive that £100,000 tax relief in my example in full. If you have any specific investment queries, please get in touch.Talk to Barnes Roffe today