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Q&A: There are limits to offsetting your expenses

Ben Chaplin

Q: We will refurbish our office soon and I understand we may benefit from the Annual Investment Allowance with respect to buying computers and furniture.

A: The Annual Investment Allowance allows a 100 per cent immediate tax offset in the year of purchase for both general and “special rate” investment in plant and machinery. Common examples of plant and machinery are: computers, office furniture and equipment, vans and lorries, business machinery, farming equipment and wind turbines.

There are some exceptions, the main one being cars. Should a business invest more in plant and machinery than the maximum AIA, the balance is added to the appropriate asset pool, and is then eligible for the annual “writing down allowance”, which is an offset of 18 per cent or 8 per cent depending on the type of asset.

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It is much used and valued by businesses and the increase has been welcomed by industry.

As in previous years, where the allowance value has changed, there will be transitional rules that pro rata the rate between the different periods. In this year’s Budget, the chancellor announced he was increasing the AIA to £500,000 to the end of 2015.

The allowance, which was introduced in 2008, was initially cut by the Coalition Government from £100,000 to £25,000. It was then increased for a limited period to £250,000 up to 31 December 2014. This has now been doubled and extended until 31 December 2015.

The allowance is not available for a period where the business is permanently discontinued. A typical example of this would be where a sole trader or partnership is incorporating its business. Care should be taken as to the date the expenditure is incurred. If this is in the final period of the sole trade or partnership, no AIA would be due to the purchaser. Also, the company would be deemed to have acquired the asset from a connected party, another situation where the allowance is no longer due. It would be best to examine where the relief is most valuable and, perhaps, consider delaying the incorporation to obtain maximum relief.

If some of the allowance is not required because of losses, or if you are trying to minimise the tax rates, it is possible to only claim on a lower proportion of the qualifying expenditure.

Should the expenditure exceed the annual maximum, it is advisable to claim the relief on assets that would only qualify for special rate expenditure (8 per cent) in priority to main rate (18 per cent) assets.

Ben Chaplin is managing director of Taxwise