Pictured: Rob Howell, director, Howell & Co

Businesses in the enviable position of making a capital investment in the near future, need to seriously consider timing following the Chancellor's announcement that the Annual Investment Allowance (AIA) is to be cut to just £25,000 from April 1 2012, advises Rob  Howell, Howell & Co, a leading small business financial advisory practice based in Lutterworth, Leicestershire.

The AIA was originally introduced to encourage capital investment by small businesses, whilst restricting the amounts available to larger organisations. It allowed the first £100,000 of capital expenditure as a tax deduction in the year of purchase and many people believed that, provided the expenditure was made before that date, then the full £100,000 AIA would still be available. 

This however, is not the case, the transitional arrangements of the new policy mean, that for businesses whose accounting year ends after 1 April 2012, the AIA available for that year has already been greatly reduced. 

For example, if a company has a 30 June 2012 year-end date then the AIA would be calculated on a pro-rata basis, i.e. 9 months at £100,000 (£75,000) and 3 months at £25,000 (£6,250), so the total AIA available would only be £81,250.

That might seem bad enough, but another potentially larger trap could be lying in wait for the unsuspecting business manager. For instance, if the capital expenditure is made after 1 April 2012 then the AIA available is limited to the amount calculated for the period from 1 April until the end of the accounting year, which in the example above would be a mere £6,250.

If the same business had capital expenditure of £50,000 in March 2012 then it would be able to claim AIA for the full £50,000, as it is less than the £81,250 limit calculated on a pro-rata basis for the year. However if the expenditure was delayed until April then the AIA would be  just £6,250. The capital allowance on the balance then limited to the 18% writing down allowance, so the tax deduction would be much lower.

In a few cases where there has been high capital expenditure it may be advisable to consider changing the accounting period end so that it ends before 1 April 2012 in order to take advantage of the current £100,000 AIA limit. Of course, this will not be appropriate for many businesses as it will bring forward when tax payments are due and may also attract the attention of the Revenue who could raise an enquiry into the tax return.

So, a word of warning, businesses planning significant capital expenditure need to consider the timing. If the current accounting period ends before 1 April 2012 then they should ensure that the capital expenditure is made before the year-end. Even if they have already started an accounting year that ends after 1 April 2012 then, wherever possible they should arrange for the purchase to be made before the end of March 2012 to avoid the trap and to ensure they maximise the AIA that is available.