Annual Investment Allowance Reduction

Annual Investment Allowance Reduction

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I recently attended a course where the lecturer explained the calculation / implementation of the revised rate for AIAs in periods that straddle April 2012. The calculation of the maximum AIA is nothing out of the ordinary, and my question doesn't sit there, where it sits is with the amount that can be claimed against expenditure incurred post April 2012 in a straddling period. It is best described with an example of rates coming into the new regime and then out from April 2012.

A company has a September year end, so in Y/E 30 September 2010, the AIA allowance in total is £75,000, with the maximum that you could claim in the period pre April 2010 being £50,000. This seemed fair as you weren't getting extra relief for the new rate, but still not getting punished for the rate change. Moving on 2 years to Y/E 30 September 2012, the AIA allowance maximum is £62,500, but logic seems to stop there. I would have said that the maximum claimable in the post April 2012 period would be £25,000 (following the principle of the 2010 change), however the legislation seems to restrict the post April 2012 expenditure to £12,500.

So a worst case scenario for a client....they spend nothing for the period pre April 2012, then spend £20,000 in the final 6 months of their September 2012 year...this client would not get the full £20,000, but only £12,500. The new rules therefore effectively reduce a business' AIA to the smaller figure...thereby punishing them purely because they delayed cap ex to later in their year. Obviously the closer to April the year end, the worse this scenario gets.... Can anyone please confirm that this is their understanding and whether you believe this is a draftperson’s error, or the actual intention of the law (which I believe is unfair!) ??

Cheers.

Replies (4)

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By PennyC
20th May 2011 12:38

Who said tax has to be fair?

In the absence of specific legislation setting out the principles that would need to be applied on any and every rate change, the calculation of the apportioned limits in any particular case can be done in any way that Parliament sees fit. I do agree that it seems to be anomalous, but - subject to amendment - the calculation is what it is. People used to claim there was an anomaly when WDAs were reduced to 20% - arguing that it was illogical that expenditure incurred before the change was subject to the hybrid rate for the period. But it's nothing more than a formulaic approach in arriving at one solution.

All it means is that taxpayers should plan the timing of their capital expenditure carefully - nothing new there.

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By mark589
20th May 2011 12:47

Tax Planning

Isn't this where a bit of basic tax planning comes into effect?

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By DarrenMoynan
20th May 2011 13:04

Missing the Point

I think the replies above are missing the point of your question.  We all know that tax isn't fair, but I see where brett.bennett's query is coming from in that a company is charged on a 12 month period, but the rules (as drafted) appear to adopt a review of the post April 2012 period.

Unfortunately, I don't know whether this was the intention, but given the government's openness to helping SMEs, I think it would be an interesting point to discuss if it was to end up in the public domain.

Yes some basic tax planning, but let's not forget common sense sometimes.  When was the last time a client called you to ask when is the best time to buy some Plant?

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By thisistibi
20th May 2011 15:28

I'm lost

Edit - never mind, I hadn't read the latest proposed legislation

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