There was a lot of publicity not that long ago about the massive increase in the AIA. However, as we know, the increases are not always that straightforward.
The £500,000 rates apply to expenditure incurred on or after 6 April 2014 (1 April 2014 for companies) and before 1 January 2016. The rate will then reduce to £200,000. However, changes in the AIA are never straight forward.
Chargeable periods which straddle 1 January 2016
In relation to a chargeable period (the second straddling period) which begins before 1 January 2016 and ends on or after that date, the maximum allowance for the second straddling period is the sum of each maximum allowance that would be found if:
a. the period beginning with the first day of the chargeable period and ending with 31 December 2015; and
b. the period beginning with 1 January 2016 and ending with the last day of the chargeable period
were treated as separate chargeable periods.
In respect of expenditure incurred on or after 1 January 2016, the maximum allowance for the second straddling period is the maximum allowance that is computed by reference to (b) alone.
A company with a chargeable period from 1 April 2015 to 31 March 2016 would calculate its maximum AIA as:
(a) the proportion of the period from 1 April 2015 to 31 December 2015, that is, 9/12 x £500,000 = £375,000, and,
(b) the portion of the period from 1 January 2016 to 31 March 2016, that is, 3/12 x £200,000 = £50,000.
The company's maximum AIA for this straddling period would, therefore, be the sum of (a) + (b) = £425,000
However, actual expenditure in period (b) is limited to £50,000 only.
Make sure your clients appreciate that £500,000 is not always the answer!