AIA – would you like the good news, or the bad? By Rebecca Benneyworth

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Rebecca Benneyworth looks at HMRC's proposals for the new annual investment allowance

In HMRC's recently issued consultation document on the proposed Annual Investment Allowance (AIA) there is both good and bad news. It is likely that the new allowance, proposed in the 2007 Budget, will be all good news for very small businesses, but less so for moderate sized businesses, spending significant sums each year on business assets.

HMRC have taken a very straightforward approach to the new allowance, and although one or two areas of detail have yet to be firmed up (particularly in relation to potential abuse) the allowance should be simple to operate. In essence, the allowance gives a 100% allowance for expenditure on plant and machinery (other than cars) of up to 50,000 each year, to ever...

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17th Aug 2007 13:04

What happens to proceeds
Rebecca poses the interesting question of what happens to the proceeds of assets sold which have fallen within the £50k AIA.

I would expect similar treatment to the way proceeds are dealt with currently when FYAs are claimed and proceeds (assuming lower than cost) are deducted from the pool. A complexity does arise here of course in that you will need to have records as to whether the proceeds fall out of the 20% pool or the 10% pool depending on whether the asset fell within the definition of integral fixture or not.

This might also answer Ian's question as a business incurring less than £50k a year may still need to calculate balancing charges.

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16th Aug 2007 19:56

Break evens
Hi there
Sorry all I've had some time off!. Yes, I was only comparing AIA with FYA, in other words, who is better or worse off under the new rules compared to the allowances they would get now. I should have made this a bit clearer!

In response to Gary Glitter II, the consultation document makes it clear that any expenditure over and above the first £50,000 will go into the pool and attract either 10% or 20% WDA, rather than AIA. So although a number of commentators expected nothing at all on the excess over £50,000 in any year (I, too saw a number of references to this) this is clearly not what HMRC have planned.

And thanks, Gary. I had not ready through to the end of the document and picked up the commencement rules until later. I agree with your comment.

It is going to be very interesting!

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By Anonymous
13th Aug 2007 16:51

I think that Rebecca was only comparing AIA and FYA when looking at the break even point as the AIA is intended as a replacement for FYA.

For example, if you spend £100k today as a medium sized company, you get £40k FYAs whereas if we were under AIA rules, you get £50k allowances.

If, however, the spend was £130k today you get £52k allowances - you would only get £50k AIA.

Companies will still need to consider which items are capital as they will need to put them in the relevant pools in order to claim the AIA.

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By Anonymous
13th Aug 2007 17:28

Someone suggested that if you claim the AIA, then there would be no allowances EVER for the excess expenditure in the year. So if you have big capital expenditure, you simply avoid claiming the AIA and settle for 20% a year writing down allowances. Were they right? Sounds logical to me.

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13th Aug 2007 13:56

Break even further
I agree with Catherine that for small businesses the breakeven point is £133,333 of allowable expenditure.

This would give allowances under old and new of £66,667 (Old: £133,333 @ 50%; New £50,000 + £83,333 @ 20%)

Similarly for medium sized businesses I calculate the breakeven would be £200,000 of allowable expenditure to give £80,000 of allowances (Old: £200,000 @ 40%; New: £50,000 + £150,000 @ 20%)

Are we missing something or have we just misunderstood?

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By ringi
13th Aug 2007 16:39

Less accounting costs for small companies.
If I have not missed anything, this should mean that most companies with outgoing less then £50,000 will find it rather easy to work out their corporation tax without the need for an accountant. There will be no need for small companies to think about capital allowance at all, or decide witch items of expenditure is capital.

Now if only we could have cash accounting for small companies corporation tax like we do for vat…

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By Anonymous
10th Aug 2007 11:56

Section 5.15, 5.16, 5.17
Regarding commencement rules, section 5.15 and 5.16 (with an example at 5.17) relate to AIA transitional rules.

In your example, the 30 June 08 year end would receive a reduced AIA from 1/4/08 to 30/6/08.

Or am I reading it wrongly?

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29th Aug 2007 14:10

Sorry - been away but...
Not sure yet what happens on disposal - this whole game is still going to be happening through the pool, isn't it? So if an asset on which AIA is claimed is then sold, we're writing the proceeds back to the pool for Balancing Charge purposes?

We have a number of violinists who'll be drooling at getting AIA on instruments that don't (in truth) depreciate, but which nevertheless qualify as plant and machinery. But they are usually sold down the road at a profit. But usually this is in order to trade up so a subsequent year's AIA will wipe out the Balancing Charge.

But if the whole AIA game takes place away from the pool, we may have implications on subsequent sales...

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By Anonymous
31st Aug 2007 12:51

The way I read the consultation document is that the AIA is set against the first £50,000 that you spend. To me this means that anything bought on 1 January must have AIA set against it before anything bought on 2 January (assuming 1 January period start).

As the AIA can apply to general pool items, I wouldn’t expect the legislation to require that you strip these assets out and record them separately. Otherwise we would have an AIA pool of assets.

Therefore, if you dispose of a pool item that was part of the AIA claim then there is no difference to what currently happens.

If it is a short life asset, however, you would be clobbered with a bigger balancing charge than would arise at present. This could lead to some items that would normally be treated as short life assets being lumped in to the pool to avoid any future balancing charge.

Does anyone read it differently?

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