2012 sees the reduction in the Annual Investment Allowance (AIA), the generous tax relief available on the purchase of assets.  From April 2012, the concession reduces from £100,000 to £25,000.  We highlighted this in our blog from May 2011.  However, we thought we would describe a scenario to outline the importance of getting the timing right.

The AIA is apportioned on a time basis.  For a company with a 31 December year end, the entitlement for 2012 will be:

£100,000 x 3/12          £25,000

£25,000 x 9/12            £18,750

Total                            £43,750

If the company wishes to spend £50,000 on assets, they would receive £43,750 AIA if the expenditure was before 31 March 2012.

However, if the expenditure was after 1 April 2012, the AIA would be restricted to £18,750.

The balance of allowances that would not benefit from AIA would still receive relief, but only at 20% - and this is reducing from April 2012 to 18%.

So you can see how the timing of expenditure can significantly accelerate the relief you receive.

When a business invests in equipment or machinery, it receives tax relief through capital allowances.  Currently, they benefit from the Annual Investment Allowance (AIA), which gives 100% tax relief for ‘plant and machinery’ investments.  The 100% relief is currently capped at £100,000.  However, this drops to £25,000 with effect from April 2012.  Any expenditure over £25,000 will qualify for relief but only at 18% of the balance.  Therefore, if you have any plans to buy large pieces of kit in the next couple of years, it makes sense to try and get it in before this date.

For vehicles, vans qualify as plant and machinery, but cars do not.  Therefore, if you are thinking of getting a new vehicle for your business, it may be worth having a word with us first.

Also, if your business is a sole trader or partnership, AIA’s reduce your profit for tax purposes and also tax credit purposes.  Therefore, if you claim tax credits and invest in plant and machinery – and remember this includes vans – not only will you reduce your tax bill, but you will also legitimately increase your tax credit claim (depending upon your circumstances).