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There can be plenty of ups and downs when running your own business. One of these might be whether or not to take the plunge and buy that new van, piece of machinery, or one of the other thousands of items which qualify for capital allowances.
Rather than automatically writing off 100% of the cost against profits, capital allowances spread the tax relief on these expenses over several years, with the rate of allowances generally being 8% or 18% per annum, depending on the asset. However, for the last few years, it’s been possible to claim up to 100% of qualifying expenditure on plant and machinery items, subject to a limit – the Annual Investment Allowance (‘AIA’). That limit has risen and fallen over the years, with the latest change announced by the Chancellor in his December 2012 Statement. From 1 January 2013, and until 31 December 2014, the annual limit on such expenditure has been increased from £25,000 to £250,000 (reverting to £25,000 on 1 January 2015). This ten-fold increase in the limit may make this kind of decision a little easier and offer some valuable tax savings. The following example identifies just how effective this increase could be in the right circumstances:
Ginger Ale Limited has a 30 June 2013 year-end and is thinking about buying a new bottling machine at a cost of £220,000. If incurred in June 2013, the maximum AIA would be £137,500, leaving £82,500 which would obtain tax relief in subsequent years at 18% of the reducing balance. If completion of the deal is deferred until July 2013, AIA would be available in respect of the full £220,000, providing 100% tax relief. This does defer the relief by one year, but ensures maximum allowances can be claimed much sooner.
Clearly, the key point is timing – ensuring expenditure is incurred in the ‘correct’ period can maximise AIA and may assist with cash flow, especially if the 8% rate of allowances would otherwise apply.
If there is capital expense in the pipeline, Springfords will be happy to explain the twists and turns of these new rules. We can help you make the best decisions for you and your business in order to secure maximum benefit from the temporary AIA increase. Please get in touch with your usual contact or speak to Ian Haynes on 0131 440 5000.