In an effort to stimulate investment by businesses in the UK the government in 2014 raised the maximum amount of annual investment allowance (AIA) to GBP 500,000, up from GBP 250,000 in 2013/14. This temporary increase in the AIA continues until 31 December 2015, after which the allowance will decrease to GBP 25,000. To know more about 2016 changes, read our presentation.
The annual investment allowance is a tax deduction of 100% of the cost of certain categories of asset purchased by the business. For small companies the benefit is therefore worth 20% of the cost of the asset in reduced tax for a business purchasing an asset before 31 December 2016. The UK government considers that this will encourage businesses to buy eligible assets before the temporary period of increased allowances finishes.
The annual investment allowance applies generally to purchases of plant, machinery and equipment by a business. The main exception is for cars which do not qualify for the allowance. It does not apply to the purchase of buildings but could apply to certain fixtures and fittings within a building that are classified as plant under the tax legislation. The AIA cannot be given for plant and machinery that was previously used for another purpose, for example a computer that was used privately and then acquired by the business; and it cannot be claimed for any assets that were gifted to the business. Another restriction is that the AIA cannot be claimed in the accounting period in which the business ceases to trade.
Any plant and machinery purchased in excess of the GBP 500,000 limit would qualify for capital allowances under the normal legislation which grants an 18% tax allowance on the written down value of the plant and machinery, or an 8% deduction on the written down value of certain assets that must be include in a “special rate” pool of expenditure. This “special rate” pool includes some assets that are used for thermal insulation; integral features in buildings; and long life assets, which are assets with an expected useful life of more than 25 years.
A tax deduction is also available for certain asset purchases through first year allowances. These allowances are given for certain energy saving equipment; water saving equipment; plant and machinery for gas refueling stations; gas, biogas and hydrogen refueling equipment; carbon equipment biofuel plant; and new zero-emission goods vehicles. The UK government is using these allowances as an incentive for companies to reduce carbon emissions and switch to cleaner energy sources.
A new company can reduce its tax bill by using government tax incentives. The definition of the tax relief and interaction between different incentives can be complex. A new company should therefore find an agent or accountant who can advise on the tax relief available.