Annual investment Allowance rises to £250,000 – but how do you calculate how much your clients can spend on plant and machinery and get immediate tax relief?

  • By Phil Williams
  • 30 January 2013 00:00

The tenfold increase in Annual investment Allowance (AIA) caught everyone by surprise and is obviously good news for clients. However, its introduction with effect from 1 January 2013 has brought with it complex provisions for accounting periods straddling this date. And if the accounting period also straddles the 1/6 April 2012, the transitional provisions go into overdrive. Will you be able to tell such clients how much they can spend on plant and machinery in the remaining part of their accounting period?

Well not easily if you read the draft legislation or HMRC initial guidance to the legislation.

What is relatively straightforward is the basic computation for the overall amount of AIA a person is entitled to in a period which straddles 1 January 2013. A company with a 12 month accounting period ending 28 February 2013 for example will get one month of the £100,000 limit that applied for expenditure up to 31 March 2012, nine months of the £25,000 limit and just two months of the new £250,000 limit.

This gives an overall limit of £68,750:

Overall AIA limit:

Proportion calculation:

in months

up to 31 March 2012

£8,333

1 April to 31 Dec. 2012

£18,750

from 1 January 2013

£41,667

Total AIA

£68,750

A general principle of AIA is that it does not matter when in the accounting period a company spends the money. However, when AIA increases, the legislators become paranoid about giving too much relief for expenditure incurred before the increase - in this case 1 January 2013.

So if the company spent £68,750 in December 2012, it will not get the benefit of the increase in the annual AIA to £250,000.

But the question then is, how much relief will it get? Looking at the calculation above, you may think the answer is only £18,750 (as that is the limit for the sub-period from April to December or maybe the total of £8,333 + £18,750 (as that is a limit under the pre-1 January 2013 regime). However the actual answer is £22,917.

I can explain this, but only because I have spent about 15 hours getting to grips with the legislation and constructing a spreadsheet which converts the legislation into formulae.

The relief is arrived at by computing a figure (called 'A' in the draft legislation) which is:

'the amount that would have been the maximum allowance for the period beginning on the 1/6 April 2012 and ending at the end of the straddling period if that period had been a separate chargeable period and the increase to £250,000 had not taken place'.

So compute an AIA figure for a notional period which starts on 1 April 2012 and ends on 28 February 2013 (i.e. an 11 month period) but on the basis that the annual AIA limit is £25,000. That means 11/12 of £25,000 which is £22,917.

In the words of Aleksandr Orlov 'Simples!'

Unfortunately that's not the end of the computations. What if the company had also incurred expenditure on plant in the period from 1 March to 31 March 2012? The legislation then requires further computations:

  • Firstly to calculate how much AIA will be given for the expenditure incurred prior to 1 April 2012;
  • Secondly revisit the calculation of 'A' above, to compute another figure 'B', then deduct B from A and that tells you how much AIA will be given for the expenditure in December 2012.

I am not even going to try to explain those computations in this blog. You will probably lose the will to live.

So returning to the title of this piece - how do you calculate how much your clients can spend on plant and machinery and get immediate tax relief?'

The most important point is that actual expenditure by the company in my example in either or both of the periods from 1 March to 31 March 2012 and 1 April 2012 to 31 December 2012 will affect the company's maximum AIA available in the period up to the end of the current accounting period, 28 February 2013. So you will need this information in order to give an answer.

Once you have this information, you can compute the answer. So continuing my example:

Actual expenditure 1 March 2012 to 31 March 2012£nil
Actual expenditure 1 April 2012 to 31 December 2012£68,750
Compute relief for pre-1 January 2013 expenditure
1 March 2012 to 31 March 2012N/A
1 April 2012 to 31 December 2012 (see above)£22,917
Maximum relief for expenditure from 1 January to 28 February:
Given by lower of:
Overall AIA limit (see above)£68,750
Less: AIA for period to 31 March 2012£Nil
Less: AIA for period to 31 December 2012£22,917
£45,833
And
Total of AIA if periods 1 April to 31 December 2012 and 1 January to 28 February 2013 were separate chargeable periods
Period 1 April to 31 December 2012£18,750
Period 1 January to 28 February 2013£41,667
Total£60,417

So maximum relief is £45,833.

Conclusion?

This, you may agree, is a pretty good intellectual exercise, but what are the chances of the company getting this right without help? The legislators seem to have forgotten the need for the mainstream aspects of our tax system to be readily understandable.

If you would like help in ensuring your clients make the most of the increase in AIA, the spreadsheet tool in the Mercia AIA pack may help. Click here to find out more.

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