Business

How to counter reduction in the annual investment allowance

Businesses are limited to claiming annual investment allowance on £200,000 worth of assets annually
Businesses are limited to claiming annual investment allowance on £200,000 worth of assets annually Businesses are limited to claiming annual investment allowance on £200,000 worth of assets annually

QUESTION: My company is currently incurring large amounts of capital expenditure including significant amounts of plant and machinery. The reduction in the annual investment allowance on January 1 2016 was a huge disappointment for businesses spending large amounts of capital expenditure. Can anything be done to counter the reduction in available capital allowances?

Answer: The annual investment allowance is a way to claim tax relief on many assets that your business will buy. It’s a kind of capital allowance.

If your business buys a piece of equipment that qualifies for the annual investment allowance, you can deduct 100 per cent of the cost of that asset from your business’ profit before you work out how much tax is due on that profit.

The government sets a limit for how much annual investment allowance a business can claim in a year, which means that if you buy assets costing more than the limit, you won’t be able to claim annual investment allowance on all your assets. From January 1 2016 the limit is £200,000 per annum.

If your business is registered for VAT, you claim the annual investment allowance on the total cost of the asset less any VAT you can reclaim on that asset. If your business is not registered for VAT, you claim the annual investment allowance on the total cost of the asset.

Most small and medium sized businesses would be well advised to utilise the annual investment allowance providing their total capital expenditure for the period is within the new limit of £200,000.

Larger more complex businesses that regularly exceed this amount might achieve a better tax position by leasing their equipment over the useful life of the asset. This may be especially relevant to assets that depreciate heavily such as computers and IT systems or in cases where machinery is needed for a short term contract, say a trial production of pharmaceuticals.

Also, start-up businesses short of cash might also do well to consider leasing even though the asset may not qualify for the annual investment allowance. For most businesses in this category the acceleration of capital allowance is likely to be less important that the initial cash outlay which is generally less for a lease agreement.

Another option is to consider whether any of the expenditure qualifies for the 100 per cent 'enhanced capital allowances' which can be claimed for certain expenditure on energy-saving and environmentally beneficial plant and machinery.

Loss-making companies have the possibility of surrendering some or all of the enhanced capital allowances (ECAs) for a 19 per cent tax credit but any repayment cannot exceed £250,000 and may be restricted by reference to the company’s PAYE and NIC liabilities.

Whether or not expenditure already incurred qualifies for ECAs is a question of fact but there may be time to revisit proposed expenditure to determine whether there is an overall benefit to be gained by substituting qualifying ECAs for non-qualifying ECAs.

:: Malachy McLernon (m.mclernon@pkffpm.com) is director at PKF-FPM Accountants (www. pkffpm.com)