Why You Should Spend Now to Save Tax (Annual Investment Allowance)

Why you should spend money now to save tax? Forthcoming changes to the Annual Investment Allowance (AIA):

In this short guide and pratical example, Tim Adcock, Mitchell Charlesworth's specialist Tax Partner explains why it may be a good idea to take advantage of the current Annual Investment Allowance (AIA) before April 2012.

Spend or Save?

In June 2010, the chancellor announced that capital allowances would change significantly in April 2012. The annual investment allowance (AIA) is to reduce from £100,000 to £25,000 and the annual writing down allowance is going to reduce from 20% to 18% for the general pool and 10% to 8% for the special rate pool.

Therefore if you are planning one off capital expenditure above £25,000 it may well be worth bringing it forward before the date of change.

To ensure that the AIA is used as fully as possible, timing of expenditure needs to be considered to ensure it falls within a period where AIA is available to be used.

Care needs to be taken where the accounting period overlaps the date of change (31 March for companies and 5 April for unincorporated businesses and LLPs) as the AIA is only available in the period to which it relates.

Practical Example:

Building Widgets Ltd  has a June 2012 year end. They spend £30,000 in January 2012 and £20,000 in June 2012.

AIA available: July 11 to March 12 - 9/12 x £100,000       -     £75,000

April 12 to June 12 - 3/12 x £25,000     -       £ 6,250

Total: £81,250

The £30,000 spent in January will be relieved against the £75,000, however the £20,000 will only be partially relieved against the £6,250 with the balance going into the general pool, eligible for writing down allowances. If £15,000 of the expenditure can be brought forward into March or delayed until July assuming no further expenditure, then this would be relieved in full, resulting in less tax being paid in the short term, which with current reducing rates of corporation tax would result in an actual tax saving.

For an unincorporated business in the above example a reduction in tax payable would also result in lower payments on account.

Delaying payment:

It may be possible to arrange for goods to be delivered in March, but pay for them later to utilise the higher AIA. However if payment is not contracted to be made within four months of delivery, then the date of purchase for capital allowance purposes becomes the date of payment and no advantage derived.

In the above example the £20,000 due to be spent in June is then rescheduled and the plant is delivered and invoiced on 31 March, with payments of £5,000 due on 31 May, 30 June, 31 July and 31 August. The £5,000 due to be paid in August will not qualify as March expenditure and will be treated as incurred in August 2012 for capital allowance purposes. If the August payment is actually made on 31 July this will not be taken into account as it is the date that the payment is required to be made which is relevant.

Further Information:

For further information about the changes to Annual Investment Allowance or for any other tax enquiry, contact Mitchell Charlesworth's Specialist Tax Partner, Tim Adcock on tel: 0151 255 2300 or complete a quick enquiry form today.

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