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Capital expenditure and the 2013 Annual Investment Allowance

Posted by: edwinsmith on February 15th, 2013

The Annual Investment Allowance, AIA, was reduced on1 April 2012 for and 6 April 2012 for income tax from £100,000 to £25,000. The draft Finance Bill 2013 includes a measure to increase the AIA from 1 January 2013 for two years to 31 December 2014 to £250,000. The AIA enables small and medium size businesses to claim full tax relief on most plant and machinery. 

There are now two changes within a year so the transitional rules for businesses with a chargeable period that spans both dates above are complex. If your business is in this category then please contact us for more information. If your accounting period ended after 6 April 2012 and on or before 31 December 2012 please see our earlier article on how the changes in April 2012 affected your allowance. 

To determine the amount of the AIA available to a business, two calculations need to be performed. Firstly, a calculation to evaluate the overall maximum AIA that may be claimed for the whole period and secondly to evaluate any cap for expenditure incurred in each of the notional periods that the accounting period is divided into to take account of the different amounts of AIA. 

For periods ending on 31 December 2012, the transitional rules mentioned in our earlier article will apply. For businesses with a year end of 31 December 2013 the AIA will be £250,000. For businesses with an accounting periods ending in 2013 other than 31 December, the accounting period will be divided into two or three notional periods to make up the chargeable year:-

  1. Firstly, a notional accounting period beginning before1 April 2012and ending on 31 March 2012 / 5 April 2012 – period A
  2. Secondly, a notional period commencing on1 April 2012/6 April 2012 and ending on31 December 2012– period B
  3. Thirdly, a notional period commencing on1 January 2013 through to the end of the accounting period – period C 

 

For accounting periods divided into two notional periods, the maximum AIA will be calculated by taking the number of months in period B at the AIA rate of £25,000 and adding the number of months in period C at the AIA rate of £250,000. A cap will then apply for period B such that the maximum AIA is calculated as if the 2013 rate was not introduced, so that the rate of £25,000 applied for the whole period. There is no cap for period C other than the overall maximum.

For example a company with an accounting year end of 31 March 2013 will have a maximum available allowance of £81,250 (£18,750 for period B and £62,500 for period C). For any capital expenditure incurred in the nine months to 31 December 2012the allowance will be capped at £25,000. There is no cap for period C, the three months to 31 March 2013, subject to the overall maximum of £81,250. So a business which has purchased equipment costing £30,000 in the nine months to 3 1 December 2012 will only be able to claim an allowance of £25,000 for that period but will be able to incur capital expenditure of £56,250 in the three months to31 March 2013 if they wish to use their maximum AIA of £81,250 in full. 

These rules are based on the draft 2013 bill which has yet to receive Royal Assent so there may be some changes yet. The transitional rules for when the AIA reduces from 1 January 2015 will also be complex when the chargeable period straddles 31 December 2014and we will write another article on this at the beginning of 2014 assuming the reduction is not delayed to a later date. If you would like further information please contact us.

Filed under: Self Assessment, Tax