Save £’000’s on Tax by carefully planning machinery purchases from the start of this year until the end of 2014

“This is a very generous increase that will be warmly welcomed by many small businesses. It is an open invitation to almost all businesses to invest and get a 20% (or more) subsidy for all their plant and machinery investment.” Chartered Institute of Taxation – 5th December 2012.

One of the surprises in the 2012 Autumn Statement was a temporary tenfold increase in the Annual Investment Allowance (AIA) from £25,000 to £250,000 for capital expenditure incurred on eligible plant and machinery (new or used but not cars) on/after 1st January 2013 and before 1st January 2015. After this period the AIA is destined to revert back to £25,000. The benefit of an AIA is to accelerate the timing of the tax relief by providing 100% tax relief for qualifying capital expenditure in the accounting period in which the expenditure is actually incurred. This is particularly attractive where the rates of corporation tax are falling; acting promptly may generate higher tax relief before the top rate of 24% falls to 21% from April 2014. The AIA applies to ALL businesses - so for unincorporated businesses paying 40% or more in income tax - the tax relief could be substantially greater. Annual expenditure above the first £250,000 will attract the usual 18% annual Writing Down Allowance in the first year with the balance going in to the pool of allowances for subsequent years. Under normal circumstances it can take up to 12 years to write off 90% of a machine’s cost against tax.

Timing of expenditure is crucial
In order to secure the maximum available tax benefit, it is vital that a carefully planned and possibly phased purchase programme takes due regard of the business’ financial year end, particularly if the accounting period straddles the January introduction and end dates of the temporarily enhanced AIA. Get the timing and /or the amounts wrong and the business could either miss out on available tax relief or worst still, end up paying far more tax than required.

A business with the same accounting period as the tax year would normally be easy to calculate but the January introduction of the AIA creates a straddling period which results in only 3/12ths of £250,000 being eligible for an AIA claim for any expenditure in the first calendar quarter of 2013 i.e. £62,500 instead of £250,000. However, if there is no expenditure in that first quarter then up to £62,500 of potential tax write off will be lost in that accounting year. The flip side of the coin is a business with a calendar financial year ending 31st December. It could spend £250,000 at any time from the 1st January until the end of December 2013 and, given that it makes at least £250,000 of profits during 2013, will be able to write off the whole amount. Different companies with different accounting periods will result in different amounts and different key periods of expenditure. There are further rules relating to the timing of the capital expenditure which can restrict the maximum AIA entitlements. These rules are quite complex and financial advice will be needed from your accountant or Finance Director.