The Autumn Statement of 3rd December 2014 confirmed what had already been announced in the March 2014 Budget – a temporary increase in the Annual Investment Allowance (AIA) from £250,000 to £500,000 with it scheduled to revert back to £25,000 on 1st January 2016.
The enhanced AIA of £500,000 is available for capital expenditure on plant, machinery and commercial vehicles (not cars) purchased from April 2014 until 31st December 2015. This an important tax incentive which accelerates the tax relief so that 100% of eligible expenditure can be offset against taxable profits in the first year instead of taking up to 12 years to reclaim 90% of the original cost using the normal 18% annual writing down allowance. In effect for every £1 spent the Government will give you £1 back in the form of relief against your taxable profits. The net benefit will depend on the rate of income tax or corporation tax that your business pays – which could be between 20% and 45%. It is the equivalent of a subsidy to encourage businesses to invest in plant and machinery.
Capital expenditure via a Hire Purchase (HP) agreement is also eligible for exactly the same AIA, just as if you had paid cash, but you will also gain a terrific cash flow advantage. Potentially your business could gain up to £500,000 in tax relief after only having paid the deposit and the interest charged is also 100% tax deductible. All businesses, including Plant Hire businesses, can claim the AIA – the only exceptions are Mixed Partnerships or Trusts (i.e. those in which a company is a member). If you have not already planned how to maximise the benefit speak to your accountant or finance director now. If your Financial Year end is March or your Tax Year End is April then your £500,000 AIA is about to drop to £375,000 – get the timing right and under these circumstances there may still be an opportunity to claim £500,000 + £375,000 in AIA tax relief during 2015.
Timing is critical
Proper advice is needed because different financial years that straddle either the tax year or calendar year end may result in complicated calculations that could result in a lesser AIA being granted in that financial year. The chart below illustrates the maximum amounts available by showing four different financial year end companies and how vital it is to spend the right amount within the right periods in order to maximise the tax benefits. For financial years ending in 2015 the maximum AIA actually available may be lower than the amounts indicated in the chart, depending on the timing of the expenditure. Given the lead times of some plant and machinery, from order to delivery, this also needs to be carefully factored in to your buying plans. Get the timing and /or the amounts wrong and your business could either miss out on available tax relief or worst still, end up paying far more tax then is required.
Other factors being equal, if your business is contemplating purchasing plant in the near future, there are some strong tax-based and cash flow arguments to carefully plan plant purchases before the end of your financial year and certainly before 1st January 2016, so that you can maximise on the available AIA before it drops to a paltry £25,000.
For more information please contact our Direct Sales Team on 0800 150650.
JCB Finance Ltd is authorised and regulated by the Financial Conduct Authority. JCB Finance provides asset finance for UK businesses for both JCB and non-competitive plant, including vehicles and cars but it is not a tax or financial advisor – always seek advice from your accountant or finance director, because every business’ circumstances are different. Businesses should not make investment decisions purely on a tax basis.