By Louise Kelly, Audit Partner, Grant Thornton in Belfast
It is not often that we feel we are getting something for nothing, but with the introduction of an increase in the Annual Investment Allowance, it almost seems that we are nearly there.
The Annual Investment Allowance (AIA) is the tax relief a company gets when it makes a capital investment. In 2018, if a company made a significant investment in plant and machinery, up to £200,000 was deducted from taxable profit when calculating the tax charge. In the recent Autumn Budget, this allowance was increased to £1m for a period for two years.
So, what does this mean? In simple terms, it means, that for the tax year ending 31st December 2019, up to £1m of capital expenditure can be deducted from taxable profit. For example, putting this in money terms, if a company spent £1,500,000 on plant and machinery, £1,000,000 would be deducted from the company’s taxable profit when calculating the tax charge.
To illustrate this, let’s say the company’s taxable profit is £4,000,000 which would result in a tax charge of £760,000 (based on tax rate of 19 per cent). With the new allowance, the company’s taxable profit would be £3,000,000 (£4,000,000 less allowance of £1,000,000) which would result in a tax charge of £570,000, a saving of £190,000. This represents a significant tax saving and if your company needs to replace plant and machinery, now is certainly the time, as there is a direct cash flow saving.
An added benefit is that AIA can be claimed on capital equipment financed under Hire Purchase contracts for the full amount during the period the contract is entered into. This is a great advantage for those businesses that are unable to commit to large amounts of capital investment from their own cash available. The savings in year one and year two will go a long way to paying the finance on the equipment!
However, the benefit does have a time limit. The allowance has been given a time frame of two years so it will be applicable for tax years ending 31st December 2019 and 31st December 2020.
Furthermore, if your accounting year straddles the tax year, the allowance will be time apportioned, therefore timing of the capital investment is very important in order to maximise the benefit to the company.
Planning is everything, not just on timing of your capital expenditure but also to ensure that the capital expenditure does qualify. Your tax advisor will be able to help you with this, so if you have capital investment on the horizon, now is the time to contact them.