From 1 January 2016, the AIA was increased to an annual limit of £200,000. Unlike previous changes, this is a permanent increase.
The AIA allows businesses to write off 100% of expenditure in qualifying assets and equipment, up to the appropriate limit, against their tax liabilities. In effect, qualifying expenditure is treated as any other business expense: it reduces taxable profits.
There have been a number of changes to the £200,000 limit in recent years and where the AIA ceiling has changed, there are transitional considerations that need to be taken into account.
The following example illustrates how these transitional arrangements work in practice:
Where a business has a chargeable period that spans 1 January 2016, the maximum allowance for that business’s transitional chargeable period comprises 2 parts:
(a) the AIA entitlement, based on the temporary £500,000 annual cap for the portion of the period falling before 1 January 2016
(b) the AIA entitlement, based on the £200,000 cap for the portion of the period falling on or after 1 January 2016.
A company with a 12-month chargeable period from 1 April 2015 to 31 March 2016 would calculate its maximum AIA entitlement based on:
(a) the proportion of the period from 1 April 2015 to 31 December 2015, that is, 9/12 x £500,000 = £375,000, and
(b) the proportion of the period from 1 January 2016 to 31 March 2016, that is 3/12 x £200,000 = £50,000.
The company’s maximum AIA for this transitional chargeable period would therefore be the total of (a) + (b) = £375,000 + £50,000 = £425,000, although in relation to (b) (the part period falling on or after 1 January 2016) no more than £50,000 of the company’s actual expenditure in that part period would be covered by its transitional AIA entitlement.
The AIA remains a valuable tax allowance, especially for smaller businesses. It will be interesting to see if Philip Hammond announces a further boost to investment by increasing this relief as part of his autumn statement November 2016.