Business Finance: Peter Harrup examines changes to the Annual Investment Allowance (AIA)

Peter Harrup of BDO LLP.

Peter Harrup of BDO LLP. - Credit: Archant

This year’s Budget made few headlines but could prove to be good news for your long term investments.

The annual investment allowance (AIA) was introduced in 2008 and allows businesses to claim 100% tax relief for business investment in plant and machinery (up to a maximum amount) in the year it is bought.

The annual maximum has changed many times and from April 2014 (April 1 for companies, April 6 for other businesses), it rises from the current £250,000 to £500,000, although the new limit will only apply until December 31, 2015 when it is scheduled to revert to £25,000.

If your accounting year runs to March 31, it is relatively straightforward to see how much investment you can claim relief on. Sadly it’s not so simple if your accounting period straddles April 2014 (or any of the dates on which the AIA limit has changed).

As a starting point, you must treat the parts of the accounting period which fall before and after the change as stand-alone periods and calculate the allowance due for each part. Then the allowance for both parts is added together. So, for example, for an accounting year ending December 31, 2014, the allowance would be: (3/12 x £250,000) plus (9/12 x £500,000) = £437,500.

However, there are also maximum expenditure limits for amounts spent before each straddling date and these are calculated as if the AIA had not changed. In this example, the maximum expenditure incurred before April 1, 2014 that qualifies is £250,000. If this maximum amount is spent in that part of the accounting period, there is a remaining £187,500 available for expenditure from April 1 to December 31 2014. However, the limit for purchases between January 1 2015 and December 31 2015 will be £500,000. Clearly, it is wise to double check your entitlement before you invest.

The increase in the annual ISA investment limit to £15,000 (£4,000 for children) and the proposed changes to pensions to give individuals greater access to their pension funds make both forms of saving more attractive. Although the annual limit on pension investment is reduced to £40,000 from 2014/15 onwards, paying a pension contribution from your company remains a highly tax-efficient way of taking funds out of your business.

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: : Peter Harrup is a partner at the Ipswich office of BDO LLP.