Tax Bite – Benefiting from the Annual Investment Allowance where cash is tight

In the 2014 Budget the Chancellor announced an increase in the Annual Investment Allowance (“AIA”) – which provides for a 100% first year allowance for business expenditure on qualifying plant and machinery –to £500,000 per annum.  This followed the temporary increase to £250,000 which became effective from 1 January 2013.  After 31 December 2015 the AIA will return to its previous limit of £25,000.

If companies are short of cash then there are a couple of ideas that might allow the business to benefit from the temporary increase in the allowance:

  1. Hire purchase – where assets are acquired by a person under hire purchase arrangements (i.e. where the contract provides that the person shall or may become the owner of the assets on performance of the contract) the legislation provides that all the capital expenditure payable under the contract is deemed to be incurred at the time when the asset is brought into use.  This means that the business gets a full deduction for the capital expenditure, even if the instalment payments are structured over a longer period (including payments after 31 December 2015).
  2. Pension fund loan – if the business operates a Small Self-Administered Pension Scheme (“SSAS”) then the trustees  may be able to loan money back to enable the business to make capital purchases and claim the AIA.  The loan can only be made to the sponsoring employer, and must satisfy other “commerciality” rules set down by HMRC in order to qualify as an authorised payment.  However, in principle, given that the business may already have had tax relief for the pension contribution, this is a very tax efficient solution.  We recommend obtaining advice from a pensions expert when considering loan backs.

For further information, please speak to your usual Forbes Dawson contact.

 

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