Planning your capital expenditure
Businesses must carefully plan their capital expenditure programmes if they are to make best use of the new £50,000 annual investment allowance (AIA).
Expenditure on most business plant and machinery can qualify for the allowance, which gives 100% tax relief in the year of purchase. It applies to expenditure from 1 April 2008 for companies, and from 6 April 2008 for sole traders and partnerships.
Not surprisingly, cars do not qualify. However, there is a separate 100% allowance for the cost of new cars with carbon dioxide emissions of not more than 110g/km. The 100% first year allowance for designated energy-saving or environmentally beneficial plant or machinery also continues alongside the AIA, as does the 100% allowance for capital expenditure on research and development. Expenditure on long-life assets and assets for leasing qualifies for the AIA.
If you spend more than £50,000 in a year, the excess expenditure will only attract a writing-down allowance, which has now been reduced to 20% from 25%. It may therefore be worth bringing forward or delaying expenditure to avoid exceeding the £50,000 AIA limit in any one year.
The allowance is proportionately increased or reduced for accounting periods that are longer or shorter than 12 months. There is also a restriction where a period spans the introduction date. So if, for example, your company makes up accounts for the year to 31 December 2008, the maximum entitlement to AIA for that year is £37,500 based on the period 1 April to 31 December 2008.
Further aspects of the AIA that require care are the rules on related businesses. Companies that form a group are entitled to only one AIA between them. Companies that do not form a group, but are controlled by the same person or persons, will also share just one AIA if they are ‘related’, which basically means sharing business premises or having similar activities. The same goes for unincorporated businesses under common control. However, if a sole trader also controls a limited company, both businesses will be entitled to their own AIA, regardless of whether they are ‘related’.
Please get in touch so that we can help you get to grips with the new rules. We can calculate your maximum entitlement to AIA, so you can plan your purchases to make best use of the new allowance.