Changes to Annual Investment Allowance from 6th April 2012 and Maximising tax relief for the cost of machinery

Changes to Annual Investment Allowance from 6th April 2012 and Maximising tax relief for the cost of machinery

What is Annual Investment Allowance (AIA)?

The AIA is a form of capital allowance which offers tax relief at 100% on all qualifying expenditure on plant and machinery in the year of purchase. Currently the maximum you can deduct is £100,000. However, from 6th April 2012 this amount is being reduced to just £25,000.
There are exceptions to the plant and machinery that qualifies for AIA such as cars and plant and machinery gifted to your business.
AIA is adjusted for short or long accounting periods, and also for accounting periods that span the rates and dates of differing AIA.

Who can claim AIA?

Almost all types of businesses can claim AIA provided the business activity satisfies one of these criteria: trading; commercial property letting; office or employment; or leasing. The only business structures which are not eligible for the AIA are mixed partnerships (that is, partnerships comprised of both individuals and companies) and trustees.

Capital Expenditure above the AIA

A business which invests in qualifying plant and machinery above the AIA threshold may be able to claim other capital allowances i.e. tax relief on the remaining balance. Generally speaking a flat rate of 20% is applied to apportion the investment over subsequent years. Please note from 6th April 2012 this rate is changing to 18%.

All this means that if you are planning to spend significant funds on plant and machinery, you should think about doing so before 6th April 2012.

An alternative way to maximise tax relief on the cost of machinery post 6th April 2012

While there is no way to avoid the cut in AIA, a business can still obtain 100% tax relief for equipment in the year of purchase to an almost unlimited value. This is achieved by setting up (or using an existing) specific type of company pension scheme known as a Small Self-Administered Scheme, usually referred to as a SSAS.

Small Self-Administered Schemes (SSAS’s)

A SSAS is a company scheme where the members are usually all company directors or key staff. The scheme must be set up by a trust deed and so is separate to the company.  In the event of business failure, assets within your SSAS are in trust and therefore cannot be touched. A SSAS allows members to retain full control over the scheme’s assets, providing a great deal of flexibility.  

A unique advantage of a SSAS is that it can be used to loan money to your company for certain expenditure (known as a loanback), including the purchase of plant and machinery. If a loanback is made the following conditions must be met:

• The loan can not exceed 50% of the SSAS fund value. For example, where the value of your SSAS is £100,000 the maximum loanback   that can be made is £50,000.                                                     

•  The loan must be secured as a first charge against the equipment

• The loan's terms can be no longer than 5 years

• Interest of  at least 1% above bank base rate should be charged on the loan

Example of a business buying equipment through a SSAS

X Ltd has 2 directors/shareholders who wish to buy a new piece of equipment which costs £75,000. To fund this acquisition the company pays a pension contribution of £100,000 (£50,000 for each director) into a new SSAS which they have set up. The SSAS lends X Ltd £50,000 (50% of the SSAS fund value) and other company funds are used to meet the remaining £25,000 of the equipment price. X Ltd claims AIA on £25,000 and receives a full tax deduction on the full £100,000 pension contribution. This effectively means X Ltd has received a 100% tax deduction for the cost of the equipment.

If you require any further information on the changes in the Annual Investment Allowance or on Small Self-Administered Schemes please do not hesitate to get in touch.

Article by Gemma Bartlett

Disclaimer: The opinions in these articles are the views of the author of the articles and not necessarily the views of Vincent and Co and all information is correct at time of publishing. The copyright remains as the authors.