All change for the AIA: the capital allowance rules change on 31 December 2015.

On 1 January 2016 the Annual Investment Allowance (AIA), which gives a business a 100% deduction for capital expenditure on plant & machinery and other assets, falls from £500,000 to £200,000.

Most sole traders are unlikely to be affected by this reduction, however the transitional arrangements could have an unexpected impact on companies with accounting periods straddling the calendar year end.

For example:

Pubcompany Limited is refurbishing a public house and proposes to incur capital expenditure of £400,000.  The company’s year end is 31st March and the directors are considering whether to delay the expenditure into the new year. 

The change in the rate of AIA means that the company’s year is divided into two parts:

  • 1 April 2015 to 31 Dec 2015, £500,000 x 9/12 = £375,000
  • 1 Jan 2016 to 31 March 2016 £200,000 x 3/12 = £50,000

The maximum AIA for the accounting year is £425,000, however the AIA available in respect of expenditure incurred during the period from 1 January 2016 to 31 March 2016 is restricted to £50,000.

If the expenditure were incurred in December the full amount of £400,000 would be covered by the AIA and be available for deduction from the company’s taxable profits.

Delaying the expenditure would reduce the amount of AIA available to just £50,000.  Written down allowance (WDA) would be available for the remaining £350,000 but this would be at a maximum rate of 18% reducing the tax deduction to £113,000.

For more information on capital allowances and changes of rates, see our Capital Allowances section and Land & Property sections.