The Annual Investment Allowance (AIA) dictates up to what amount you can deduct the full cost of qualifying plant and machinery from your taxable profits. Any expenditure incurred outside the AIA is relieved through writing down allowances.
As covered in our blog posted 27th July, from 1 January 2016 the AIA is reducing from £500,000 to £200,000, which will come as a blow to businesses spending in excess of £200,000 on qualifying plant and machinery.
The mechanics of this change are straightforward for businesses whose financial year falls in line with the calendar year; however for those who do not have a December year end, the AIA should be apportioned.
For example, a business with a 31 March 2016 year end will have an AIA of £425,000; nine twelfths of £500,000 totalling £375,000 plus three twelfths of £200,000 giving £50,000.
However, expenditure incurred from 1 January 2016 up to the accounting year end cannot exceed the proportion of AIA calculated for that period. For example; for those with a March year end, if you are spending more than £50,000 it may be worthwhile doing so before 1 January 2016 if you want to claim for the full cost in the year of purchase. The maximum AIA for expenditure incurred from 1 January 2016 to the end of the transitional period will depend on the year end, so if in doubt check with your tax advisor.
For further information please contact Green & Co.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.
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