Guest Article: Don’t miss the opportunity to reduce your Corporation Tax bill – the clock is ticking
Have you heard of the Annual Investment Allowance (AIA)?
It is a type of capital tax allowance that offers 100% tax relief on qualifying capital expenditure in the year of purchase.
Since its introduction in 2008, there have been several changes in the allowance, ranging from £25,000 to £500,000 as the maximum potential tax relief. Such volatile changes have not provided long term reassurances for investment, hence the AIA is not yet a widely known benefit.
However, in the 2015 Budget, the Chancellor declared that the AIA would be set at £200,000 every year from January 2016 - great news for a stable future for planning investments in your business assets. But if you are eligible for the benefit of up to £500,000, the clock is ticking; the £500,000 limit only applies to capital purchases made prior to 1st January 2016.
How does the AIA work?
Currently the first £500,000 of expenditure on qualifying business assets are 100% allowable against taxable profits of a business, deductible in the fiscal year that you buy them. This accelerates the tax relief rather than utilising the writing down allowances (WDA) of 18% or 8% per annum - which create deferred tax positions and take more than 20 years to claim the full benefit for your business.
Qualifying assets include:
- LCV and HGV
- Fixtures and fittings
- Plant and machinery
- Computer / technology hardware and software
Therefore if your taxable profits are £1 million and you have spent £450,000 on assets, for example, you will only be taxed on £550,000. If your accounting period is more or less than 12 months you need to adjust your AIA allowance, as follows:
Example: If your accounting period is 9 months, the AIA will be 9/12 x £500,000 = £375,000.
With the reduction of the AIA to £200,000 in the New Year, many business are looking to bring forward purchasing decisions in order to maximise those capital allowance benefits this year and reduce the sum on which they pay corporation tax.
If you haven’t set a capital budget, don’t have the cash or don’t want to use Bank facilities that have been allocated to other projects or involve taking additional security over your personal or business assets, take 5 minutes to consider the benefits of asset finance.
Simon Goldie, head of asset finance at the Finance & Leasing Association (FLA) says:
“Leasing and HP are terms that most businesses would understand, but asset finance — which is exactly those two things — is less familiar,” he says. Yet in terms of freeing up credit for long-term business expansion, he believes the advantages are unquestionable.
“If you are looking to source some equipment and either don’t have the ready cash or want to save it for something more vital, asset finance is the obvious way to go”.
Goldie adds that if equipping a business without exhausting other lines of credit is understandably attractive, so too is the typical lending criteria.
“Asset finance providers are no less rigorous than other lenders but because they know they can always take the equipment back, the security is against the asset, not the firm.
“Many SMEs are delighted to find that the whole system is very much more straightforward than taking out a bank loan.”
This also allows companies to free up capital that they can reinvest in their business. And because loans are secured on the asset being financed there is more security — the loan cannot be recalled during the period of the agreement - and is flexible because businesses have the option of replacing or updating equipment when the contract expires.
With the clock ticking on the current AIA, you might want to consider whether hire purchase (leasing does not qualify for this particular benefit) may be an excellant alternative way of bringing forward your capital expenditure plans to maximise your allowance benefits and minimise the tax you pay to No 10!
To contact Alex Wilkins, please email firstname.lastname@example.org.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.