SMEs must act in a few weeks to maximise tax relief on major capital investments

  • Annual Investment Allowance expected to drop from £500,000 to £25,000 on January 1
  • Last reduction in Annual Investment Allowance saw £1.5 billion fall in amount of tax relief claimed on capital spending
  • Government urged to maintain Annual Investment Allowance at current higher level in Budget

blytcksyelm0pygsgekzSMEs have just a few weeks left to plan major investments in machinery and equipment before tax relief on capital investments is cut to a fraction of its current level, warns BNP Paribas Leasing Solutions, one of the biggest providers of lease and hire purchase finance in the UK.

BNP Paribas says that businesses need to place major orders for investments in capital equipment by the summer, as eligibility for the current Annual Investment Allowance (AIA) of £500,000 will depend on equipment being on site and ready for use by 31 December. Acting now will allow for lead times of several months on large and complex orders such as customised machinery.

BNP Paribas estimates that delaying and missing the December 31 deadline for investments could cost a business a saving of up £389,500 from its next tax bill.* From 1 January, the value of the AIA is expected to fall by 95% to £25,000.

BNP Paribas Leasing Solutions points out that businesses that want to take full advantage of the current tax benefits available for major capital investments and still keep cash flow healthy can choose leasing rather than outright purchase. They will be able to claim the Annual Investment Allowance for investments as long as the item is in use on their premises by the end of December, and will not need to have made all the payments by that date.

Tristan Watkins, UK country manager for BNP Paribas Leasing Solutions says: “Delaying decision making on major investments could prove to be very expensive.”

“We are ready and waiting to provide the finance needed to help businesses commit to that decision in time; investing in their growth and that of the real economy across the UK.”

“Major capital investments such as a complete IT hardware and systems refit, a combine harvester for a farm, or large-scale excavation equipment for a construction business cannot just be bought off the shelf, and will easily exceed the £25,000 limit that the Annual Investment Allowance is expected to fall to.”

“If they are planning a major investment, businesses will need to get talking to suppliers now, and will generally need to have placed an order by the summer in order to ensure that their investment qualifies for the £500,000 Annual Investment Allowance relief that is available now.”

Last reduction in Annual Investment Allowance saw £1.5 billion fall in amount of tax relief claimed on capital spending.

BNP Paribas Leasing Solutions urges the Government to use the forthcoming Budget to keep the AIA at its current higher level indefinitely. It points out that the AIA has played a crucial role in encouraging businesses to make very significant capital investments. Previous reductions in the limit for the Annual Investment Allowance have had a major impact on the amount of relief claimed.

After the AIA was cut by 75% from £100,000 to £25,000 for the 2012/13 tax year, the value of relief claimed fell by 21% from £7.2billion to £5.7 billion.

Continues Tristan Watkins: “Even a couple of years ago businesses were clearly using the Annual Investment Allowance to help fund major investments, not just day-to-day capital spending – which is why its use fell so sharply when the limit was cut.”

“Now that the economic recovery is taking root and business confidence is returning, we would expect an even larger number of businesses to be looking to the AIA to transform their prospects.”

“The AIA has proved its worth in encouraging business investment. Using the forthcoming Budget to keep it at its more generous level indefinitely could be transformative for many businesses and indeed for the UK economy. It would ensure that businesses can make the investments they need, at the time that makes most sense for their business.”

 

Claiming the Annual Investment Allowance

  • The Annual Investment Allowance can be claimed for purchases made through Hire Purchase contracts and certain finance leasing arrangements.
  • Businesses can use a portion of the £500,000 Annual Investment Allowance to claim relief against their 1 January 2016 corporation tax bill, and use the balance of the allowance to deduct the cost of eligible investments made by the end of December from their 2015 / 16 bill.
  • Eligible capital investments exceeding the Annual Investment Allowance limit qualify for writing-down tax relief at a much lower rate of 8% or 18% per annum. This means that it takes several years to gain the full tax benefits available for larger capital investments.
  • Businesses should seek advice from their accountant because the exact date of their year end could affect their AIA allowance for the current year.

*For an investment of £500,000, £25,000 would qualify for the AIA at its new limit. The £475k balance would qualify for writing down allowances at a maximum of 18% – equating to a first year allowance against tax of £85,500.

 

Within the BNP Paribas Group, BNP Paribas Leasing Solutions specialises in leasing and rental solutions for professional equipment, offered either directly to businesses or through its manufacturer, reseller or distribution network.

With almost €28.8 billion of assets under management, BNP Paribas Leasing Solutions is a European leader in equipment finance with a wide-ranging offer, extending from leasing arrangements to long term rental solutions.

As a business enabler, BNP Paribas Leasing Solutions provides value-added solutions to its clients and partners, and its 2,800 employees operating worldwide are strongly committed to deliver a high standard quality of service, based on 5 commitments: expertise, simplicity, responsiveness, innovation and responsibility.

Thanks to its global approach and local coverage, BNP Paribas Leasing Solutions is able to support its clients’ and partners’ business development in 22 countries worldwide: namely Austria, Belgium, China, France, Germany, India, Italy, Netherlands, Poland, Portugal, Romania, Spain, Turkey, United Kingdom, and through the BNP Paribas Group’s entities in Algeria, Gabon, Ivory Coast, Luxembourg, Morocco, Senegal, Tunisia and USA.