Make sure AIA claims are in order

In just a few weeks the Annual Investment Allowance falls from £100,000 a year to £25,000 so it is important to make sure transactions go smoothly before that cut off.

Machinery is the obvious area of qualifying investment but many other plant and equipment purchases can be overlooked, so advisors suggest a check to ensure all expenditure is properly classified.

Several common AIA pitfalls can have a big financial impact on businesses.

Contract, HP and date traps

If using hire purchase, make sure the investment is brought into use in the accounting period in which the AIA is being claimed, otherwise it will not be available or will only be available on any instalments paid by the 1 April or 6 April cut off.

Identifying the correct date for qualifying capital allowance expenditure is crucial.

Where assets are being bought outright, ie with no finance, then delivery date, invoice date or contract date may be key for claiming AIA, says Henry Mullens of accountant Chavereys.

Expenditure is usually treated as being incurred on the date when the obligation to pay becomes unconditional, which HMRC interprets as the date of delivery.

However, when there is a gap of more than four months between the point at which the obligation to pay becomes unconditional and the date when payment must be made, then expenditure is treated as not incurred until the date on which payment is required to be made.

So, long delivery lead times or delays in delivery for machinery could take claimants outside this four month period and into the new lower £25,000 AIA period.

“You can get allowances on an asset that has not been delivered, but you need to make sure that the contract is correct and that the specific asset is identified and earmarked for you, but just not delivered ie, that there really is an unconditional contract and that it does not say “payment on delivery” as that can then be deemed to be the condition that has to be satisfied,” says Mr Mullens.

“This can be a contentious area and one that HMRC may well be looking at with the forthcoming change in rates of AIA.”

Year end and tax year traps

Understanding accounting dates and how they relate to AIA is important. For those whose year ends coincide with the tax year ends of 31 March (for companies) and 5 April (sole traders and partnerships), things are straightforward because the relief available at 100% covers the same periods.

Where an accounting year straddles two tax years, entitlement to AIA is calculated on a pro-rata basis.

For example, a sole trader or partnership with a 30 June year end is currently (2011-12 tax year) entitled to relief on £75,000, representing three quarters of the current £100,000 AIA and one quarter of the £25,000 AIA due to come into force from April this year. However timing of expenditure in the correct tax year is crucial.

Connected businesses or persons trap

Tight rules govern how the allowance can be used by connected businesses or parties, so take care when planning how to utilise the maximum AIA, to gain the greatest benefit, says Mike Harrison of accountant Saffery Champness.

For example, a family farming partnership may operate a company owned by the same individuals to carry out the farming operations on the partnership land.

“In the 2011-12 tax year, the partnership buys £40,000 of equipment and the company purchases a tractor for £70,000.

“This would mean that the company would not receive 100% relief on the tractor. A claim could be made to gain relief on the whole £70,000 but this would in turn restrict the relief in the partnership to £30,000, which highlights the need for good planning.”

If a partnership has a company member then no AIAs are available to the partnership although AIA may be available to the company if it is trading in its own right.

AIA factbox

• AIA is the amount a business can invest in plant and equipment in an accounting year and set 100% of that investment against income in the same year.

• AIA is £100,000 (tax year 2011-12), dropping to £25,000 from April 1 for companies and 6 April for partnerships and sole traders.