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The 2015/16 Annual Investment Allowance – A brief summary

The Annual Investment Allowance (AIA), which was set to be reduced from its temporary figure of £500,000 to a mere £25,000 will, from 1st January 2016, be set at a figure of £200,000 – a U-turn that is the sure to delight businesses and entrepreneurs throughout the UK

Osborne Budget

The AIA was introduced back in 2008 to help SMEs increase their productivity and scale. In simple terms, it enables businesses that invest in capital to claim 100% tax relief on equipment and machinery, up to the limit set for the year of expenditure. This allowance can be fully utilised by a business, assuming there are no associated companies, in which case the allowance is shared. With the new allowance from 1st Jan 2016, if a business’ taxable profits stand at £400,000 at the end of the financial year, it will be able to reduce this figure by up to £200,000, depending on how much it has invested in business equipment throughout the previous 12 months.

Nevertheless, there are important rules and regulations regarding how much can be claimed during the financial year when there is a change in AIA. This year, for example, when the figure will change on Jan 1st 2016 from a temporary figure of £500,000 to a figure of £200,000, businesses will have to abide by a pro-rata AIA. Assuming a financial year-end of 31st March 2016, nine months of the accounting period (from 1st April 2015 to 31st December 2015) will be subject to the £500,000 AIA, whereas three months (1st January 2016 to 31st March 2016), will feature the £200,000 AIA. Once prorated, the allowances for the two separate periods will be £375,000 and £50,000 respectively.

In total, therefore, businesses with a 31st March year-end will have a maximum AIA of £425,000 but will only have access to an allowance figure of £50,000 in the first three months of 2016. Careful planning of timing and expenditure will, therefore, be crucial, and any businesses looking to make an investment in equipment would be better off making it this side of 2016, ensuring maximum use of their £375,000 AIA entitlement for the rest of 2015.

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