Philip Hammond, Chancellor of the Exchequer, recently announced that from January 2019, the Annual Investment Allowance would increase from £200,000 per annum to £1,000,000. The move has the potential to dramatically alter the MHE market and could make savvy fleet managers very popular with their finance directors…
What is the Annual Investment Allowance (AIA)?
The AIA was introduced in 2008 to provide an incentive for companies to invest in tools and equipment, by allowing the total cost to be offset against taxable profits. The rules mean the equipment purchase and generated profit must be accounted for in the same period and any expenditure over the (currently) £200,000 limit is subject to the normal writing down allowances of 18 or 8 %.
AIA is an incentive for businesses to invest because it accelerates the tax relief available. So, it can all be claimed in the year of investment, rather than over a number of years, helping a business’s cash flow.
This has been of limited interest to the MHE world, as the UK market predominantly consists of equipment on contract hire. Even so, others have used the allowance against outright purchases, timing their orders to be delivered by the end of the financial year to ensure that they do not lose any unused allowance. But with AIA increasing to £1,000,000 from January, will 2019 be different? Perhaps.
Whilst the AIA is allocated by calendar year (January to December), the ability of a business to maximise tax savings will depend on how much qualifying investment is made in its financial year. A business will have to allocate next year’s £1,000,000 allowance according to its own financial year. So, a business with a financial year ending 31 December, the maths is easy since the financial year and AIA cover identical timescales and the business will have the full £1,000,000 allowance available for immediate tax relief.
For a business with a financial year end of 31 March, only three months (£250,000) of next year’s allowance will be available for immediate tax relief, with the remaining nine months (£750,000) of the 2019 allowance allocated to the next financial year.
So, to return to the question asked, might there be any need for a business to take advantage of any unused 2018 AIA before December? Well, lead times on MHE equipment might make it essential, but a more accurate answer could be: it depends.
Whether businesses will need to rush to use their allowance before the end of December depends on several things:
- How much AIA is available for their current financial year?
- Is the business making a taxable profit that exceeds the annual investment available for its financial year?
- How much of the 2018 AIA has been used?
Using a year-end of 31 March as an example, and assuming that taxable profits will exceed the available allowance, there might be a need to use any outstanding 2018 AIA if the cost of all equipment being acquired before April 2019 exceeds £250,000. In these cases, a degree of urgency will need to be applied to ensure that any equipment subject to the 2018 allowance is on site before the end of this December.
Purchase is best
For any business that wishes to take full advantage of their available AIA but avoid an immediate cash outlay, a hire purchase agreement is the perfect solution.
At Jofson, we can also offer built in service contracts and/or a three year warranty on purchased equipment, looking after your finances and your fleet for the long-term.