Well, strictly, if your business has a year end which straddles 31 December 2015, then it needs to buy any assets that qualify for the annual investment allowance (AIA) before 31 December 2015 in order to maximise its AIA claim.
The AIA is currently £500,000. This decreases to £200,000 from 1 January 2016. However, the rules work in a bizarre way for businesses that have accounting periods which straddle 31 December 2015. For a business with a 31 January 2016 year end the maximum AIA is 11/12 of £500,000 + 1/12 of £200,000 = £475,000. So far, so good. However, the maximum spend in January 2016 that would qualify is only 1/12 of £200,000 = £16,667!
Example 1
A business with a 31 January year 2016 end is buying a £250,000 asset and its previous AIA qualifying expenditure in the accounting period is £100,000. If the asset is bought on or before 31 December 2015, all of the £250,000 will qualify for the AIA. However, if it is bought in January 2016, only £16,667 will qualify. If the difference qualifies for main pool allowances at 18% then for a 40% income tax payer the difference in the tax bill for the year ended 31 January 2016 is £76,533, or £38,267 for a company paying tax at 20%.
The effect is only slightly less extreme for businesses which have a 31 March or 5 April year end, which is shown in Example 2.
Example 2
With a 31 March year end and the same numbers as Example 1, the maximum AIA for the year ended 31 March 2016 is 9/12 of £500,000 + 3/12 of £200,000 = £425,000. However, the maximum AIA that can be utilised in the three months ended 31 March 2016 is 3/12 of £200,000 = £50,000. This means that, if the £250,000 asset is bought on 31 December 2015, all of it will qualify for the AIA. If instead it is bought between 1 January and 31 March 2016, only £50,000 will qualify. If the difference qualifies for main pool allowances at 18%, then for a 40% income tax payer the difference in the tax bill for the year ended 31 March 2016 is £65,600, or £32,800 for a company paying tax at 20%.
Summary
Please note that for capital allowances to be available, the obligation to pay must be unconditional, which usually means that the asset needs to have been delivered before it can qualify for allowances. If it is bought on HP then it needs to be in use before capital allowances are claimed. Given that many businesses shut down between Christmas and the New Year and in order to ensure that the AIA is maximised, for businesses that have year ends that straddle 31 December 2015, it really does pay to buy before Christmas!
One cautionary note is that it may well be worth bringing forward expenditure by a few days or even a few weeks in order to bring the tax relief forward by a year. However, if a business needed to bring expenditure forward by several months in order to achieve the tax savings shown above, then commercial considerations may override the tax savings, which are essentially a timing difference. It is best to take professional advice before major expenditure decisions are taken.
