I own a food processing business and considering a significant investment in equipment to upgrade my food production facility. What will the increase in the annual investment allowance in the recent budget mean for my business?
Capital allowances can reduce a tax payer’s income tax (self-employment) or corporation tax liability (Company) by reducing the taxable profits. The Annual Investment Allowance (“AIA”) rate is currently 100% on expenditure on plant and machinery, equipment and fixtures and fittings up to a spend of £200,000. Any capital expenditure in excess of £200,000, capital allowances at 18% would be claimed on a reducing balance basis. The AIA allows businesses to claim capital allowances upfront, rather than claiming them each year at a rate of 18%. In the recent budget, it was announced that the AIA would be increased from £200,000 to £1,000,000 (per annum) which will come into effect from 1 January 2019 for a 2-year period. This means that business would receive 100% capital allowances on expenditure incurred on up to £1,000,000 rather than the current rate of £200,000, allowing business to receive tax relief on capital expenditure much faster. It is important to note that where a business’s year end spans the 1 January 2019, the current AIA of £200,000 and the proposed AIA of £1,000,000 would be pro-rataed. For example, if a business has a 31 March year end, the total AIA would be £400,000, however, only £150,000 of this could be claimed in the period from 1 April 2018 to 31 December 2018 and £250,000 from 1 January 2019 to 31 March 2019. Therefore, if a business is planning a capital spend and the year-end spans 1 January 2019, they should consider reviewing the expenditure dates to ensure that the AIA is maximised.
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