Businesses worried about missing out on tax breaks due to the reduction in the Annual Investment Allowance (AIA) should avoid panic buying, according to accountancy firm Knill James.
>See also: Annual Investment Allowance explained -2020 update
In his Summer Budget chancellor George Osborne announced that AIA, currently at a temporary inflated rate of £500,000, will be set at a permanent rate of £200,000 at the start of 2016.
Businesses with a year end in the last quarter still have the full £500,000 allowance but, depending on the timing of their expenditure, this could fall straight back to £200,000 when the bells ring in the New Year.
The AIA is an amount that businesses are permitted to spend on ‘plant and machinery’ necessary to maintain and grow a business at zero percent tax. This definition incorporates industrial vehicles and ‘integral parts’ of buildings including fixtures and fittings.
Since 2010 the allowance has been increased from £100,000 to £500,000 in an attempt to stimulate growth across SMEs by incentivising investment in the future. The current rate was only temporary however and before Osborne’s announcement the rate was set to drop to the original £25,000 level at the end of 2015.
Knill James senior manager Mike Chapman appealed to businesses that are concerned about the change in circumstance not to make any snap financial decisions.
“If you haven’t been planning for this since the Summer Budget, however, don’t panic buy,” he warned. “There will still be £200,000 worth of annual tax relief available in the years ahead and disrupting your cash flow might have repercussions for the business further down the road.”
“Any tax break that provides a 100% tax deduction for your business in year one should have been central to your business planning all year round.”
Osborne’s announcement in July met with a mixed reception. While some were relieved the rate was not returned to pre-2010 levels, others were disappointed the chancellor didn’t go further.
Mark Tighe, managing director of capital allowances specialists Catax Solutions, accused the Osborne of “falling short in his promises to support SMEs”.
“With the cap set to fall back to £25,000 at the end of the year, numerous business leaders have already recommended the allowance to be set above the current level of £500,000 – but the Tories haven’t listened,” he warned.
“The Chancellor’s apparent ‘laser-like focus’ on productivity is somewhat misguided and it is now crucial Mr Osborne reevaluates the way in which he intends to help SMEs continue to spend and grow.”