From January 1, 2016 the Annual investment Allowance is reducing.
The Annual Investment Allowance (AIA) is a tax allowance which business can use to claim an accelerated 100% tax deduction on plant and equipment purchases in the year they are acquired. This includes purchased Commercial Vehicles (cars are excluded).
The current tax allowance limit is £500,000 and from January 1, 2016 this annual limit reduces to £200,000. So there will be greater capacity to accelerate deductions in 2015 versus 2016 for certain Commercial Vehicle customers spending between £200,000 and £500,000, (assuming they have not already in 2015 made other qualifying plant equipment investment).
Businesses can either use the 18% main pool writing down allowances for commercial vehicle purchases or they can accelerate their capital allowances by using the 100% Annual Investment allowance. All plant and equipment (including commercial vehicles) up to the AIA limit bought in the financial year can be included in the AIA. Business buying commercial vehicle (cash or finance) can calm 100% writing down allowances against the AIA. The total amount of the utilised AIA is then offset against any taxable profit. Once the 100% allowance has been used then the 18% WDA is applied to the remaining value of pool.
In this example your customer is purchasing two vans at a cost of £20,000. The two examples show the taxable benefit in utilising AIA in 2015. It is important to note that this is timing only and the tax liability in later years maybe higher.
|Sole Trader with Annual Investment Allowance of at least £40K available||Sole Trader with NO AIA available|
|Total purchase price £40,000||Total purchase price £40,000|
|Taxable profit before AIA £60,000||Taxable profit £60,000|
|100% AIA writing down allowance (£40,000) applied to taxable profit.||Standard 18% WDA £7,200|
|Taxable profit after AIA £20,000||Taxable profit after WDA £52,800|
|Sole trader income Tax @ 40% £8,000||Sole trader income Tax @ 40% £21,120|