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How to navigate the potential treasure trove of the Annual Investment Allowance

Would your business like to significantly invest in new assets or equipment to innovate and grow?

In addition to alternative finance solutions, the Annual Investment Allowance (AIA) can help to achieve this and boost cash flow by reducing tax liabilities. But although effective the incentive has proven to be confusing and unpredictable in equal measure over the years.

Introduced in 2008 to help SMEs to scale and increase their competitive edge, the AIA helps businesses to write off the cost of certain assets against profits in the year of purchase, bringing much quicker tax relief against capital expenditure than the alternative, which would be tospread the relief over several years.

Most assets purchased for business use will qualify as expenditure and could include IT software and hardware, office furniture and equipment, industrial plant and machinery, amongst other building fixtures and fittings. In contrast, cars and items either gifted or owned prior to the formation of a business are exempt.

The amounts businesses have been entitled to have varied considerably since the AIA’s inception, initially starting at £50,000 in 2008 before rising to as high as £500,000 for a ‘temporary’ period between April 2014 and 31 December 2015. But as of 1 January 2016 the now ‘permanent’ AIA figure was cut to £200,000.

Given the sizable reduction on the previous limit, it’s little wonder that this latest shift will have thrown the asset finance plans for some SMEs into disarray if they are unaware of how much they can claim and when. Specialist SME finance providers, such as Wesleyan Bank, can offer leading advice on how to get the most out of AIA while providing tailored products to reduce the burden of corporation tax and VAT bills.

Businesses with a 31 March financial year-end are entitled to claim a maximum AIA of £425,000. This is based on the proportion of the period from 1 April 2015 to 31 December 2015, which is 9/12 x £500,000 equating to £375,000, and a second notional period running from 1 January 2016 to 31 March 2016, which is 3/12 x £200,000
equating to £50,000.

Like most things, timing is crucial. Businesses who have incurred expenditure in the first three months of 2016 can only gain a maximum relief of £50,000. It might therefore be prudent to delay purchasing new equipment until after 1 April when the AIA will be set at £200,000 whereby tax relief will be deferred for a full year.

Despite its potential pitfalls, the AIA’s latest threshold still presents a good opportunity for businesses planning investments to be as tax efficient as possible and is a welcome increase on the incentive’s previous standard figure of just £25,000. It also allows businesses to claim on leased assets which are purchased with the intent of eventual ownership, ensuring SMEs can enjoy the advantages of tax relief whilst spreading out the cost of purchase over time.

'WESLEYAN’ is a trading name of the Wesleyan Group of companies.

Wesleyan Assurance Society and Wesleyan Bank Ltd are authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Wesleyan Financial Services Ltd, Wesleyan Unit Trust Managers Ltd, Practice Plan Ltd and DPAS Ltd are authorised and regulated by the Financial Conduct Authority.  Advice about investments, insurance and mortgages is provided by Wesleyan Financial Services Ltd.

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