Does an increased Annual Investment Allowance in 2019 remove the rush to invest in equipment before December?

04 DEC 2018

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In his recently presented budget, Philip Hammond, Chancellor of the Exchequer, pleased the business world by announcing that from January 2019 the Annual Investment Allowance would increase from £200,000 per annum to £1,000,000.

The Annual Investment Allowance (AIA) is the amount of qualifying capital equipment purchased (or subject to hire purchase agreements) that can be offset against tax in the year of acquisition. The effect is to bring immediate tax relief on capital expenditure that would otherwise take many years to recover and as such it has acted as a powerful incentive for businesses to bring forward investment decisions.

Over recent years there has been something of a scramble for some businesses to get equipment ordered and delivered by the end of December to ensure that they do not lose any unused allowance, so with AIA increasing to £1,000,000 from January, will this year be different? The answer, to a large extent, will depend on the date of the financial year end for the business concerned.

Whilst the AIA is allocated by calendar year (January to December), the ability of a business to maximise tax saving will depend on how much qualifying investment is made in its financial year. A business will have to allocate next year’s £1,000,000 allowance according to its own financial year. So a business with a financial year ending 31 December, the maths is easy since the financial year and AIA cover identical timescales and the business will have the full £1,000,000 allowance available for immediate tax relief.

For a business with a financial year end of 31 March, only three months (£250,000) of next year’s allowance will be available for immediate tax relief, with the remaining nine months (£750,000) of the 2019 allowance allocated to the next financial year. Examples of AIA allocation are shown below:

Timing is critical to ensure maximum tax benefit (£2,000,000 January 2019 to December 2020).

To maximise tax allowance AIA should be allocated to company financial years.

So to return to the question asked, might there be any need for a business to take advantage of any unused 2018 AIA before December? The answer will depend on:

1. How much AIA is available for their current financial year. By way of example, a business with a year end of 31 March 2019 will have:

- nine months of the 2018 allowance (£150,000)

- plus three months of the 2019 allowance (£250,000)

- making a total allowance of £400,000 for its financial year

2. Is the business making a taxable profit that exceeds the annual investment available for its financial year?

3. How much of the 2018 AIA has been used?

Using the above example (year end 31 March) and assuming that taxable profits will exceed £400,000, there might be a need to use any outstanding 2018 AIA if the cost of all equipment being acquired before April 2019 exceeds £250,000. In such cases a degree of urgency will need to be applied to ensure that any equipment subject to the 2018 allowance is on site before the end of this December.

For any business that wishes to take full advantage of their available AIA but avoid an immediate cash outlay, a hire purchase agreement is the perfect solution.

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