Transitional rules are the latest development surrounding the annual investment allowance.
The annual investment allowance (AIA) was introduced in 2008 to encourage businesses to invest in capital equipment. Under the regime, businesses may claim capital allowances of 100% of the expenditure incurred.
Since its introduction, the threshold has been increased and decreased and then increased again to its current limit of £250,000. The increased limit of £250,000 is intended to be for a two year period, for qualifying capital expenditure incurred in the period from 1 January 2013 to 31 December 2014, but who knows what future Budgets may bring.
The move is a welcome one for small businesses and, from the perspective of the economy, is intended to boost expenditure and increase growth. However, the fact that the allowance has yo-yoed so much means there are transitional rules which will, no doubt, cause some computational headaches for practitioners.
The AIA limit has changed several times since it was first introduced, as follows:
| Date of expenditure | Maximum AIA |
| 01/04/2008 – 31/03/2010 for companies
06/04/2008 – 05/04/2010 for unincorporated business |
£50,000 |
| 01/04/2010 – 31/03/2012 for companies
06/04/2010 – 05/04/2012 for unincorporated business |
£100,000 |
| 01/04/2012 – 31/12/2012 for companies
06/04/2012 – 31/12/2012 for unincorporated business |
£25,000 |
| 01/01/2013 – 31/12/2014 | £250,000 |
Each change in the rate comes with its own set of complications and transitional rules. We will look at some of these by way of example.
| Example 1
Austra Ltd has a year end of 31 December 2012. During that period, it incurs the following expenditure on qualifying plant and machinery:
Total £40,000 How much of the above expenditure will be eligible for AIA? Methodology:
In our example therefore, the AIA due would be as follows: Expenditure incurred before 01/04/2012 (Lower of £20,000 and £43,750) £20,000 Expenditure incurred after 31/03/2012 (Lowest of ((£43,750 – £20,000) AND £20,000 AND £18,750) £18,750 Total AIA £38,750 |
Let us now consider a company with a year-end that straddles the latest change on 31 December 2012 by way of an example.
| Example 2
Django Ltd has a year end of 30 June 2013. During that period, it incurs the following expenditure on qualifying plant and machinery:
Total £170,000 How much of the above expenditure will be eligible for AIA? Methodology:
In our example therefore, the AIA due would be as follows: Expenditure incurred before 01/01/2013 (Lower of £25,000 and £20,000) £20,000 Expenditure incurred after 31/12/2012 (£137,500 – £20,000) £117,500 Total AIA £137,500 |
We have also published an example of the interaction over the transitional period.
The interaction between these different components is considered in the following table:
| 1 February 2012 – 31 March 2012 | 01 April 2012 – 31 December 2012 | 01 January 2013 – 31 March 2013 |
Total |
|
| Component AIA Limit | £100,000 x 2/12
= £16,667 |
£25,000 x 9/12
=£18,750 |
£250,000 x 1/12
= £20,833 |
£56,250 |
| Transitional limit (see Note) | £16,667 (as above) +
£25,000 x 10/12 = £20,833
= £37,500 |
£25,000 x 10/12
= £20,833Less: excess used in previous period = (£16,667 – £20,000) = (£3,333)
= £16,667 |
Total of all component periods
= £56,250 Less: Used in earlier periods= (£20,000 +£16,667) = £19,583 |
|
| Amount spent | £20,000 | £25,000 | £18,000 | £63,000 |
|
AIA due |
Lower of £37,500 and £20,000
= £20,000 |
Lower of
£16,667 and £25,000
= £16,667 |
Lower of
£19,583 and £18,000
= £18,000 |
TOTAL AIA DUE =
£20,000 + £16,667 + £18,000 = £54,667 |
Note: Transitional limit is the aggregate limit for the accounting period, disregarding the increase on 1 January 2013.
The ten-fold increase in the AIA limit is a welcome development for small businesses. However, as can be seen from above, the changes do bring with it some computational headaches.
Article from ACCA In Practice