Annual Investment Allowance (AIA) allows you to deduct the full value of a qualifying item from your profits before tax and can be claimed on most plant and machinery up to the AIA amount.
From January 2019, the allowance was increased from £200k to £1m, therefore businesses purchasing plant and machinery should consider the allowance and the timing of claims.
I was recently speaking to an arable farming client about AIA. Due to good cereal and potato prices and yields, which were more substantial than he had anticipated in the middle of the dry summer, his profits for the year to March 31 2019 could be £500k-£600k.
Some of his tractors and potato equipment needed to be replaced and he was keen to take advantage of the increased AIA threshold. He asked if spending £600k on new equipment between January 1 2019 and March 31 2019 would eliminate his taxable profit, which would mostly be chargeable at tax rates of 40%.
He said the cost of new equipment was £600k and he was to gain £100k from trade-ins. He had also bought a tractor at a cost of £50k in May 2018.
Unfortunately it isn’t as simple as spending £600k to eliminate £600k profit from tax. Firstly he needed to consider the level of AIA available to the partnership. This is calculated as:
April 1 – December 31 2018 £200k x 9/12 £150k.
Jan 1 – March 31 2019 £1m x 3/12 £250k.
Total AIA available = £400k.
His expenditure on plant and machinery in the year to March 2019 would be £50k on the new tractor plus £600k on the new plant. He would also have plant disposals of £100k for the trade-ins. This meant there was no pool of unclaimed allowances brought forward.
Following calculations, his maximum capital allowances claim would be £427k. Although the planned purchases would make a dent, they would not eliminate projected profits entirely. AIA can only be claimed in the period that you bought the item and if the AIA has changed in the period you’re claiming for, then you need to adjust the amount you can claim.
Timing of capital expenditure and your accounting year end needs to be carefully considered to maximise claims during the two-year window where AIA is £1m.
Alan Taylor is a partner and rural expert at Campbell Dallas.