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Understanding the Annual Investment Allowance (AIA)

Accounting for small companies can be a minefield. How can you make the most of the current £500,000 limit of Annual Investment Allowance (AIA) tax relief?

Introduced in 2008, the AIA allows all businesses – from start-ups to FTSE100s – to claim tax relief on capital investments. But the AIA limit has already changed four times.

At present, businesses are entitled to an Annual Investment Allowance of £500,000 until 31 December 2015. The new limit after this date has not yet been confirmed.

What is Annual Investment Allowance?

The allowance is currently at an all-time high due to a government programme to try and kick-start the economy by incentivising businesses to invest in plant purchases, including machinery, tools, fixtures and equipment.

But the looming election and unconfirmed 2016 limit means that it’s anyone’s guess as to what will happen with the AIA going forwards, says new business manager at Northgate Vehicle Hire Mark Batey. “Will we see the limit plummet below its original planned limit to just £25,000? Or will government take the advice of the Institute of Directors, which suggests the limit should be increased to £1 million?”

The British Chamber of Commerce (BCC) has suggested that a permanent AIA of £500,000 would help businesses to achieve balanced growth and tackle uncertainty. Batey welcomes this approach but warns that serious planning will be needed.

Whatever the final decision, you should balance the desire to take advantage of the current £500,000 limit against the risks of rushing in. As Batey points out: “While responsible investing should never be discouraged, rushing to invest in expensive assets that may only depreciate over time is undoubtedly something to avoid.”

This becomes even more important if the limit drops after the election, he adds. “With less AIA relief available, businesses of all sizes will be forced to strategically consider which investments carry the most long-term value. So why not leave the allowance for plant purchases such as tools, fixtures and vital equipment and gain 100% tax relief all of the time regardless of the AIA changes?”

Driving down depreciation

Vehicles, Batey’s area of primary expertise, are not necessarily a good choice for AIA investments, he says. Instead, he advises considering a flexible vehicle acquisition method, through which businesses will benefit from Revenue Allowance, which delivers 100% tax relief on these rental costs.

“If you take away only one thing from this article, remember that investing in assets – such as expensive fleet vehicles – may provide immediate tax relief, but in the long run, if you’re seriously looking at how best to benefit from the AIA then investing in depreciating assets may not be the best strategy for your business,” Batey concludes. “Depreciation of new fleet vehicles in year one can be from 10% to 40%, offsetting any gains from the AIA.”

Tax relief plays an integral role in freeing up capital for investment. But it’s important to keep your finger on the pulse with schemes like the AIA, which ease financial burden and ultimately allow businesses to grow.

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