Capital allowances: proposed Annual Investment Allowance

The following are the key features of the Annual Investment Allowance (AIA):

• the AIA will replace first year allowances (FYAs); however, where FYAs are granted under separate codes in the Capital Allowances Act 2001 (eg business premises renovation, research and development, and flat conversion), these continue to apply;
• the 100 per cent enhanced capital allowances for environmentally beneficial capital expenditure continues to apply;
• each business is entitled to an AIA per accounting period, subject to apportionment for accounting periods shorter or longer than 12 months;
• for group companies (as defined under company law), there is only one AIA for the whole group;
• there are proposals for time-apportionment of the AIA where companies in a group have different accounting periods, and also where there are changes in the group membership;
• associated companies are each entitled to an AIA, subject to anti-abuse provisions;
• the AIA will amount to 100 per cent of capital expenditure, subject to a £50,000 cap;
• the normal rules for determining capital expenditure apply, therefore most plant and machinery that qualify for capital allowances under the current regime will continue to qualify;
• 'integral fixtures' will qualify for the AIA, as will long-life assets, however cars do not qualify;
• the Government is thinking of anti-abuse provisions to counter cases of artificial splitting of businesses in order to gain more than one AIA. One possible solution is a rule aggregating' such businesses where an artificial split is suspected;
• the Government is also considering anti-abuse provisions to target the artificial use of unused allowances;
• another proposal is to add an AIA 'hallmark' to the existing disclosure provisions;
• as an alternative to the anti-abuse provisions, the Government is considering a single allowance per 'economic entity', ie a single AIA where there is 'common ownership across a number of businesses'.

So those are the main features of the proposed AIA. The Government claim that they are introducing it in order to encourage investment. However, one cannot help feeling that this allowance is somewhat less generous than the current first year allowances regime. True, first year allowances are only given at the rate of 40 per cent (50 per cent for 'small' companies in some tax years), but the good thing about them is that they are uncapped. The AIA is limited to £50,000 with any excess going into the general pool to be written down at a rate of 20 per cent per year, on a reducing balance basis. Mind you, the previous rate was 25 per cent, so there is a 5 per cent drop in the allowances available in the capital allowances pool.

For small businesses that incur capital expenditure of less than £50,000 per year, the AIA will be a welcome improvement on the FYA regime. Take, for example, a business that spends £15,000 on qualifying capital expenditure. Under the current regime, a first year allowance of £6,000 (ie £15,000 x 40 per cent) is available. However, under the proposed regime, the business is entitled to an AIA of £15,000 (ie 100 per cent of the capital expenditure, capped at £50,000).

But what about a case where the expenditure incurred was a lot more? Say, £250,000. Under the proposed regime, the AIA would be capped at £50,000, whereas under the current regime, the business could claim £100,000 (ie £250,000 x 40 per cent). In such a case, the proposed regime would be a lot less generous to the taxpayer, also bearing in mind the reduction (from 25 per cent to 20 per cent) in the rate of relief in the general pool.

Another aspect of the AIA in which it is less generous than the FYA is that it is not apportioned for short accounting periods. The FYA is never apportioned, regardless of the length of the accounting period. However, that is not to be the case with the AIA. By the same token, it could also be argued that in cases of accounting periods longer than 12 months, the AIA, by permitting apportionment, is more generous than the FYA.