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Annual Investment Allowance limit reduction from April 2012 – what should businesses do?

October 7, 2011

Businesses can currently write off 100% of the cost of acquiring qualifying assets against their taxable profits, up to an annual limit of £100,000. Assets that can be written off in this way include commercial vehicles, plant, computers and other equipment – cars do not qualify.

George Osborne’s Emergency Budget of 22nd June 2010 gave notice that the Annual Investment Allowance (AIA) annual limit is to be significantly reduced from £100,000 to £25,000 from April 2012.

Unusually, business owners have an opportunity due to this advanced notice – they can rethink their capital expenditure plans for the next 20 months.

Why you should reconsider is best highlighted if we take a look at some of the advantages offered by this AIA relief.

  • Obvious really, but you can currently reduce your taxable profits by up to £100,000.
  • If you are a higher rate, self-employed trader the AIA claim could save you 40% or 50 of your qualifying investment.
  • If you earn more than £100,000 you could use the AIA claim to protect your personal tax allowance that may be lost without an AIA claim.
  • If you are a self-employed business owner or in partnership and your AIA claim exceeds your taxable profit, the resulting tax loss can be set of against your other income in certain circumstances and perhaps generate refunds.
  • Even if you trade as a limited company or if you are a basic rate tax payer you will be able to recover up to 20% (21% if you pay small rate corporation tax in 2010-11) of your investment.

We have to assume that tax relief offered post April 2012 will stay at much lower levels for a considerable period as the Government tackles the reduction in national debt. Accordingly, this is an opportunity that should not be passed over lightly.

If you were planning significant capital expenditure during the next say five years, we recommend that you call you accountant to discuss your tax options. At minimum you should find out:

  • If your planned expenditure qualifies for AIA?
  • If a claim for AIA prior to April 2012 will be tax effective, will you be able to make good use of the allowance?
  • Importantly you should examine the non-tax considerations. Is it commercially sensible to make the required investments at an earlier date?

This article has been produced with the assistance of HfM Accountants