Tax relief on capital expenditure set to fall – do you need to act?

The Annual Investment Allowance (AIA), i.e. the maximum amount of expenditure on qualifying plant and machinery that can be fully deducted for tax purposes is due to be reduced from 1 January 2016.

The allowance is currently a very generous £500,000, so (at the moment) a business can get tax relief in the year of acquisition for up to £500,000 spent on qualifying plant and machinery.

From 1 January 2016, the AIA limit will drop significantly to £200,000. Whilst many businesses will still find this limit offers comfortable headroom those who are planning significant investment should think about timing and aim to bring forward plant and machinery purchases to before 31 December 2015; before the AIA limit is reduced.

If a business’s accounting period straddles the 1 January (for example if it draws up its accounts to 31 March 2016 then things gets a little complicated.  In this case the business will be able to claim up to £425,000, this is calculated as follows:

9 months at £500,000   = £375,000

plus 3 months at £200,000   = £   50,000

however the £375,000 must be used before 31 December 2015, so for any significant capital expenditure this becomes the effective deadline.

Assets purchased on Hire Purchase also qualify for AIA.