EXECUTIVE NEWS continued
TENFOLD INCREASE IN ANNUAL INVESTMENT ALLOWANCE EHN invites Nigel Greenaway of JCB Finance Ltd to comment.
One of the surprises in the recent Autumn Statement was a tenfold increase in the Annual Investment Allowance (AIA) from £25,000 to £250,000 from 1 January this year. There was also an additional cut in Corporation Tax, with a 2% reduction from April 2014 instead of the previously planned 1% cut, resulting in a 21% rate come 2014. What are the implications for hirers considering investing in eligible plant and equipment at next month’s Executive Hire Show? For incorporated businesses, the drop in Corporation Tax actually means that greater tax savings will be made by acting now when the rates are that their highest. However, an even greater impact on the timing and size of tax relief can be achieved by utilising the enhanced AIA.
£75,000, net of interest charges, in each of the subsequent years. The £100,000 expenditure in the first year equals the £100,000 tax bill saved, so HM Revenue & Customs has effectively paid for the partnership’s deposit and its first year’s HP payments. Not only that, but the partnership has managed its cash flow in an exemplary fashion – claiming the maximum £250,000 AIA, but with an outlay of only £100,000 in the same tax year. Paying £250,000 in cash on Day One would only net the same tax benefit. However, be warned because the above scenario is relatively simple to interpret. Different financial years that straddle the tax year and/or the 1st January 2013 will result in very complicated calculations that
The AIA is designed to encourage investment on new or used equipment against taxable profits in the year in which the qualifying expenditure is made. The same rules apply to all hirers purchasing kit from 1 January this year and before 1 January 2015. The first £250,000 of expenditure is 100% allowable against tax, with any excess attracting the 18% annual Writing Down Allowance in the first year. This all sounds very good but what does it mean? Imagine a hire business trading as a partnership, with its financial year matching the tax year. It has successfully expanded its fleet to include mini excavators. However, the partnership is rapidly approaching the end of its tax year and the accountant fears that a big income tax bill is looming. Even after claiming all available business expenses, a profit of £250,000 remains, which would attract the 40% income tax rate.
The accountant explains that, if the partnership invests that £250,000 profit in replacement plant, from the 6 April 2013 onwards, then the full £250,000 AIA will apply. Paying a 10% deposit (£25,000) and borrowing £225,000 over three years on a hire purchase agreement equates to a £100,000 outlay in the first year, followed by
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will result in a lesser AIA being granted in that financial year. In the example above, if the partnership, having not purchased any plant in that financial year, decided to purchase plant on 1 January this year then it is conceivable that only 3/12 of the £250,000 could be claimed i.e. £62,500. After the new financial/tax year starts in 2013 another £250,000 will become available. The chart below illustrates this by showing four different financial year end companies and how vital it is to spend the right amount within the right periods in order to maximise the tax benefits.
Other factors being equal, if your business is contemplating
purchasing plant at next month’s Show, there are strong tax-based and cash flow arguments to carefully plan plant purchases before 1 January 2015, so that you can maximise on the available benefits.
• JCB Finance points out that it is not a tax or financial advisor. It says you should always seek advice from your accountant or
finance director, because each business is different. Hirers should not make investment decisions purely on a tax basis - there should be a compelling business case for the investment.
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