Capital allowances: AIA reduction trap

Posted by PM | on Fri, 20/05/2011 - 16:11 5443 7 comments

The Finance Bill clauses to reduce the Annual Investment Allowance (AIA) to £25,000 include some apportionment rules that could restrict the amounts available during 2011-12. Rebecca Benneyworth explains the implications and ways to mitigate them.

The limit for AIA reduces from £100,000 to £25,000 from April 2012 (1 April for companies, 6 April for income tax businesses). It is worth thinking carefully, not only about timing of expenditure, but also about accounting dates, if the client intends to incur substantial expenditure.

The way in which the limit operates for a period spanning 1 or 6 April 2012 is logical, and involves splitting the period into two across the date of change.

However, Clause 11 of the Finance Bill reveals that the maximum amount of AIA applying to expenditure in the period after the change is limited to the time apportioned limit for that part of the period. This approach has been used in previous changes of the limit but as the limit has increased it has not been a real issue. Now that the limit reduces it presents quite a practical problem.

Where an income tax business needs to incur substantial expenditure in the period up to 5 April 2012, it may be sensible to draw up accounts for the period ending 31 March (or 5 April) 2011. This may restrict the availability of allowances in 2010/11, but will then leave a complete year as the last period under the £100,000 limit, allowing expenditure of up to £100,000 to qualify for AIA claim for 2011/12. This is probably not a sensible option for a company due to the formalities associated with change of accounting date.

Continued...

Why has it been drafted this way?

Ardeninian | Mon, 23/05/2011 - 10:15 | Permalink

To clarify the above, the previous change to AIA was not restricted in this way - using the example given, but two years previous:

Year ended 30 June 2010:

1 Jul 2009 - 5 Apr 2010, 50,000 x 279 / 365 = £38,219

6 Apr - 30 Jun 2010, 100,000 x 86 / 365 = £23,562

Total AIA for the year £61,781

Here, expenditure up to £50,000 before 6 April 2010 would qualify in full, not £38,219. Likewise, up to £61,781 after 5 April 2010, not £23,562, with an overall limit of £61,781.

This is not an innocent error - the language used for the transitional provisions in each instance is completely different. So the question is, why did the Treasury deem it important to restrict allowances in this way this time around?

Answers on a postcard...

TaxManDan

What about

RebeccaBenneyworth | Mon, 23/05/2011 - 18:01 | Permalink

Finance Act 2010 Section 5 subs.(5). This restricts the pre change expenditure to the amount which would have applied for that part of the period. So in youe example, the amount of AIA on expenditure before the date of change is the limit for that part of the period. This is exactly the same mechanism, but this time the limit is reducing not increasing and hence the restriction to the period after the change, rather than before.

Not so Rebecca!

Paulsoper | Mon, 23/05/2011 - 19:15 | Permalink

The wording of s5(5) FA2010 actually says this...

"But, so far as concerns expenditure incurred before the relevant date, the
maximum allowance under section 51A of that Act for the actual chargeable
period is to be calculated as if the amendment made by subsection (1) had not
been made.

So it is not the same provision at all. Withn a 31 December y/e and expenditure of £60,000 in February 2010 the allowance was limited to £50,000 as though the amendment had not beden made.

With the same AP and expenditure of £60,000 in (say) May 2012 the allowance is restricted to 275/366 x £25,000 which is £18,784, not the same thing at. If it was the same thing it would have been £25,000.

The trap is real, it is in the legislation, but it is NOT simply the same as the increase in 2010, perhaps we all ought to point this out to our MPs who are, undoubtedly, blissfully unaware of this.

Mea culpa

RebeccaBenneyworth | Mon, 23/05/2011 - 21:07 | Permalink

Too quick to react. Yes, limited it to £50,000 on the way up, not a time apportioned amount. Apologies - I misremembered and looked for what I thought I remembered. Oh well.

In terms of representations, I think we are probably too late. Committee discussed over a week ago now and allowed the clause to stand as is. I guess we are too late to alter.

But Why??

Thanks, @paul...

Ardeninian | Tue, 24/05/2011 - 09:26 | Permalink

...for backing me up!

I don't think we're too late. Even if we're too late for FA 2011, as the change relates to expenditure post April 2012, there would still be time to lean on the relevant people for a tweak to be announced pre-Christmas 2011 for FA 2012. I know it runs counter to the new idea of stability and advance notice, but a blatant unfairness such as this should be corrected.

As a humble ATT (although CTA-elect: fingers crossed for July!) I can't do much about this, though: any volunteers?

TaxManDan

Representations

Paulsoper | Tue, 24/05/2011 - 10:37 | Permalink

I put in a comment to the revenue on this pointing out the capricious nature of the effect of the measure but didn't elicit any response at all other than an automnated acknowledgement of receipt.

My MP is also very good at deflecting matters elsewhere - an observation about the equally ludicrous limit of £4,000 on ESC C16 was sent by her to - Vince Cable, rather than Danny Alexander.

It won't stop me trying again though!

Change of Accounting Date

Paulsoper | Tue, 24/05/2011 - 10:49 | Permalink

Rebecca observes that a change of accounting date may be advisable to maximise the benefit of substantial capital expenditure and although I agree there is another point here.

From a planning point of view it can be critical, particularly with the new Annual Allowance Charge on excess Pension contributions and the ability to carry forward unused relief for three years, to know what a client's income is in the tax in question. With a 31 March y/e this is completely impossible and income can only be determined in the following year at which time it may be too late to take advantage of (for example) unused pension surplus from three years previously, don't use it, you lose it.

30 April as a year end gives the practitioner, if they take advantage of the opportunity, the ability to determine taxable income before the end of the year in which it is taxable to maximise planning opportunities such as this. You move to 31 March to take advantage of an increased limit for AIA (with a 30 April y/e £93,750 but 31 March £100,000) but you cannot then change back for 5 years and may lose planning opportunities that could be worth much more AND, by changing to 31 March in 2011 as Rebecca suggests the limit for the period of change is also time apportioned down to £91,667 anyway.

Moral (if there is one) - it is probably better to anticpate and plan the dates of capital expenditure, which can be modified by up to 4 months by early invoice and late payment, than monkey about with accounting dates and losing a lot of flexibility.