What does the Annual Investment Allowance mean for your business?
The Annual Investment Allowance for the calendar year 2019/2020 has increased to £1,000,000, but businesses may have a number of questions before making an investment decision.
What is the Annual Investment Allowance?
The Annual Investment Allowance (AIA) is the amount of money a business is entitled to spend on purchasing qualifying capital equipment, whilst claiming the full cost against tax immediately after acquisition. Under normal circumstances such tax allowances are provided through Writing Down Allowances (WDA) and the resultant tax allowances are claimed over the life of the equipment.
What is the current AIA?
The AIA is allocated on a calendar year basis and for the years 2019 and 2020 it has been set at £1,000,000. This is the highest ever set and a significant increase on the £200,000 available over the past few years.
Given that the AIA applies from January to December, what happens when a business has a financial year end other than December?
This makes life a bit more complicated because any tax benefits will need to be claimed within a company’s own financial year and the AIA from a previous calendar year cannot be carried over.
By way of example let’s look at a company with a financial year starting on 1 April 2018 and ending on 31 March 2019. During that financial year an AIA of £200,000 applied for the calendar year 2018 and £1,000,000 will apply for the calendar year 2019. In these circumstances the company concerned would need to allocate the AIA available on a pro rata basis. Given that an AIA of £200,000 was available for 2018 and nine months of that year’s allowance (April to December) fell into the company’s 2018/2019 financial year, the company would have £150,000 of the 2018 AIA which it could have offset against tax in the current financial year, any unused allowance would have been lost at the end of the 2018. So far as the current calendar year is concerned, our company would have three months of the £1,000,000 allowance available for the current financial year and the outstanding £750,000 of the 2019 allowance will be available in the next financial year, together with three months of the 2020 AIA (£250,000).
Timing is critical to ensure maximum tax benefit (£2,000,000 Jan 2019 to Dec 2020). To maximise tax allowance AIA should be allocated to company financial years.
Many companies have a financial year ending 31 March; does that mean they should consider bringing forward investment decisions?
For any company seeking to minimise tax liability for the current financial year, thought should be given to bringing forward capital expenditure. Up to £250,000 worth of qualifying equipment purchased and delivered between 1 January and 31 March will be subject to 100% tax allowance in the company’s current financial year and that company will have a full £1,000,000 AIA available for the financial year 1 April 2019 to 31 March 2020 providing £750,000 of that allowance is used by 31 December 2019.
Does equipment have to be purchased outright to qualify for AIA?
Outright purchase or hire purchase finance agreements both qualify for AIA. Hire purchase is particularly attractive because a business can get an immediate tax allowance but spread the cost of paying for the equipment over a number of years.
BNP Paribas Leasing Solutions is not authorised to provide tax advice. You should consult an accountant in order to understand the tax consequences of any investment decision.
Andy is an experienced sales and finance professional with over 25 years’ experience in sales aid leasing. Andy is widely recognised as an expert in business finance and has in recent years focused his attention on developing partner sales teams develop an understanding of how businesses secure project financing. His training programme – Finance Unlocked – is a highly rated customisable course and is offered at no cost to partners.
If you’re interested in helping your sales team overcome finance-related hurdles during the selling cycle, please get in touch with Andy on 07966 114 243 or email here.