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In his recent budget, the Chancellor announced that the limit for Annual Investment Allowance will be reduced from £100,000 to £25,000 per annum in April 2012. This means that businesses spending in excess of £25,000 on capital expenditure will see the tax relief obtained over a period of time rather than immediately.
If you are considering acquiring new plant and machinery in the near future, it may be a good idea to purchase this prior to April 2012. This could mean you would receive the tax relief immediately thus helping the cashflow of the business.
In addition to the reduction to the Annual Investment Allowance limit, the annual writing down allowance is being reduced from 20% to 18% (or 10% to 8% for integral fixtures & fittings). This means that the relief on existing assets or any expenditure in excess of the Annual Investment Allowance will be less than previously.
What does this mean for you??
Due to the different tax rates in force, the amount of relief obtained is different for Companies and sole traders/partnerships. Below are two examples showing the relief obtained on £100,000 of expenditure under the existing and new rules:-
Company – Profits of £200,000
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Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
TOTAL |
Old Regime |
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Deduction against profit |
£100,000 |
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Tax Saving at 20% |
£20,000 |
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£20,000 |
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New Regime |
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Deduction against profit |
£38,500 |
£11,070 |
£9,077 |
£7,443 |
£6,104 |
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Tax Saving at 20% |
£7,700 |
£2,214 |
£1,815 |
£1,489 |
£1,221 |
£14,439 |
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2 Person Partnership – Profits of £200,000
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Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
TOTAL |
Old Regime |
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Deduction against profit |
£100,000 |
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Tax Saving at 42% |
£42,000 |
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£42,000 |
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New Regime |
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Deduction against profit |
£38,500 |
£11,070 |
£9,077 |
£7,443 |
£6,104 |
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Tax Saving at 42% |
£16,170 |
£4,649 |
£3,812 |
£3,126 |
£2,567 |
£30,324 |
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You will see that even after 5 years, the tax relief received under the new rules is significantly less than under the existing rules.
As the new rules do not come into force until April 2012, it is possible to receive Annual Investment Allowance of up to £200,000 (£100,000 in the 2010/11 and 2011/12 tax years) prior to the new rules. If you are planning to spend in excess of £100,000, it may be beneficial to spread the cost over two accounting periods.
Please also remember that if the large capital expenditure results in a loss, it may be possible to carry this loss back to set against previous years’ profits in order to obtain a tax refund.
Tax Credits
If you are planning capital expenditure, the Annual Investment Allowance could mean your household income is less than in previous years. This may result in you qualifying for tax credits when previously you had not. As a claim for tax credits can only be backdated 3 months, it is important to keep us informed of any planned expenditure.
If you are planning to purchase new plant and machinery, etc, please feel free to contact Darren Moynan at our Carlisle Office on 01228 530913 or email darren@doddaccountants.co.uk
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