October 30th, 2012 / Insight posted in

Buy now to use up tax allowance

SS writes: I run a small maintenance business and am investing in new machinery. Negotiations with two suppliers have been going on for some time, and one has tried to get me to sign quickly by saying that we will lose out on tax allowances if we don’t complete the purchase this month. Is he right? Our company year end is June 2012.

Your supplier may be referring to capital allowances and the change in the Annual Investment Allowance (AIA) that occurs on April 1, writes Jon Sutcliffe, partner at Kingston Smith LLP.

The AIA is a 100% tax allowance for capital spending on plant and equipment, which will reduce the company’s corporation tax provided it has sufficient taxable profits. The allowance is £100,000 a year up to March 31, after which it falls to £25,000.

For the purposes of AIA your company year gets split into two, as it straddles the change. With a June year end, your company will have 280 out of 366 days of the £100,000 limit (£76,503 AIA for the nine months to March 31) and 86 out of 366 days of the £25,000 limit (£5,874 for the three months to June 30).

Qualifying expenditure above the AIA will still get a 20% allowance (18% from April) — much less than the AIA 100% rate. Given the reduction in the AIA limit after March 31, there is a good chance your spending on machinery will exceed the limit if incurred after this month.

When working out whether it is worth making the purchase before the change, you should take into account any other qualifying expenditure in the year to date.

If your company spends, say, £20,000 after March, it will get £5,874 AIA plus 18% on the balance — a tax deduction of £8,417. If the expenditure is this month and you have sufficient AIA unspent, the deduction will be the full £20,000.