Section 10 and Schedule 2: Temporary Increase in Annual Investment Allowance
Summary
1.Section 10 and schedule 2 increases the maximum amount of the annual investment allowance (AIA) to £500,000 for an extended temporary period from 1 April 2014 for corporation tax (CT) and 6 April 2014 for income tax (IT) to 31 December 2015. The increase in the amount of the AIA is effective for expenditure incurred on or after 1 (or 6) April 2014.
Details of the Section
2.Subsection (1) amends section 51A(5) of the Capital Allowances Act 2001 (CAA) so that the maximum AIA that can be claimed for a 12 month chargeable period is increased from £250,000 to £500,000, in relation to expenditure incurred on or after the start date of 1 April 2014 (CT) or 6 April 2014 (IT) and, in each case, on or before 31 December 2015. For expenditure incurred on or after 1 January 2016, the maximum AIA returns to its previous limit of £25,000.
3.Subsection (2) provides that Schedule 2 contains provisions about chargeable periods that straddle the start date or 1 January 2016, and amends or repeals certain of the provisions of section 7 and Schedule 1 Finance Act 2013 by which the maximum AIA was increased from £25,000 to £250,000 for a period from 1 January 2013 to 31 December 2014.
4.Subsection (3) explains that the start date means 1 (or 6) April 2014.
Details of the Schedule
Part 1
5.Paragraph 1(1) explains that the paragraph applies to a chargeable period that begins before the start date of 1 (or 6) April 2014 given by subsection (3) of the section and ends on or after that date. Such a period is referred to as "the first straddling period".
6.Paragraph 1(2) provides that the maximum allowance for such a period will be the sum of each maximum allowance that would be found if the actual chargeable period were split into separate chargeable periods by reference to 1 January 2013 and the start date.
The first period
Because some businesses may have a chargeable period that began before 1 January 2013, and so may be affected by the changes enacted by section 7 of Finance Act 2013, the first period is so much of the actual chargeable period as falls before 1 January 2013. The legislation does not require that there has to be such a period, but where the chargeable period starts before 1 January 2013 that period must be separately considered.
The second period
The second period is so much of the actual chargeable period as falls on or after 1 January 2013, but before 1 (or 6) April 2014.
The third or last period
The third period is so much of the actual chargeable period as falls on or after 1 (or 6) April 2014.
7.So, where a business has a chargeable period that straddles 1 (or 6) April 2014, the maximum allowance for that period is the sum of:
(If appropriate) the maximum AIA entitlement based on the £25,000 annual cap that applied before 1 January 2013, for the portion of the period falling before that date; and
the maximum AIA entitlement based on the £250,000 annual cap that applied for the portion of the period falling on or after 1 January 2013, but before 1 (or 6) April 2014; and
the maximum AIA entitlement based on the new temporary £500,000 annual cap for the portion of a year falling on or after 1 (or 6) April 2014.
8.Paragraph 1(3) provides that this calculation of the maximum AIA entitlement for the whole of “the first straddling period” is subject to paragraphs 2 and 3, which contain some additional rules about the maximum AIA entitlement for expenditure actually incurred in the period prior to 1 January 2013 and for the period ending on 31 March (or 5 April) 2014. Paragraph 2 gives the additional rules for first straddling periods beginning before 1 January 2013, and paragraph 3 gives the rules for first straddling periods beginning on or after that date.
9.Paragraph 2(1) explains that the paragraph applies where the first straddling period begins before the relevant date of 1 January 2013.
For example, a business with a chargeable period of 18 months from 1 December 2012 to 31 May 2014 would calculate its maximum AIA entitlement based on:
a.the proportion of the period from 1 December 2012 to 31 December 2012, that is,
1/12 x £25,000 = £2,083
b.the proportion of the period from 1 January 2013 to 5 April 2014, that is,
15/12 x £250,000 = £312,500; and
c.the proportion of the period from 6 April 2014 to 31 May 2014, that is,
2/12 x £500,000 = £83,333.
So, the company’s maximum AIA for this first straddling period would be the total of (a) + (b) + (c) = £2,083 + £312,500 + £83,333 = £397,917.
10.Paragraph 2(2) effectively provides that in the part of the first straddling period falling before 1 January 2013, the maximum allowance for expenditure actually incurred in this period, is the amount that would have been the maximum allowance for the whole of the first straddling period, if neither the temporary increase in the AIA to £250,000 nor the temporary increase in the AIA to £500,000 had been made. So, for expenditure incurred in period (a) of the example in paragraph 9 above, the maximum allowance would be
| 1/12 x £25,000 | = | £2,083, |
| 15/12 x £25,000 | = | £31,250 and |
| 2/12 x £25,000 | = | £4,167 |
| Total | £37,500 | |
11.Paragraph 2(3) provides that, in relation to expenditure actually incurred in the part of the first straddling period before the start date of 1 (or 6) April 2014, the maximum allowance for the whole of the first straddling period is what would have been the maximum AIA entitlement for the whole of the first straddling period if there had been no increase in the AIA limit from £250,000 to £500,000 and paragraphs 1 of Schedule 1 to Finance Act 2013 applied to that period. In other words, returning to the example at paragraph 9 above, in relation to expenditure incurred in period (a) + (b), a maximum allowance would be
| 1/12 x £25,000 | = | £2,083, |
| 15/12 x £250,000 | = | £312,500 and |
| 2/12 x £250,000 | = | £41,667 |
| Total | £356,250 | |
12.Paragraph 3(1) gives the rule about the maximum allowance for expenditure incurred in a first straddling period which begins on or after 1 January 2013. For example, a company with such a straddling period might have a chargeable period that ran from 1 January 2014 to 31 December 2014. It would calculate its maximum AIA entitlement based on:
the portion of the period from 1 January 2014 to 31 March 2014, that is,
3/12 x £250,000 = £62,500; and
the portion of the period from 1 April 2014 to 31 December 2014, that is,
9/12 x £500,000 = £375,000.
The company’s maximum AIA for its first straddling period would therefore be the total of (a) + (b) = £62,500 + £375,000 = £437,500.
13.Paragraph 3(2) provides that so far as expenditure is incurred in the part of the first straddling period falling before the start date of 1 (or 6) April 2014, the maximum allowance is to be calculated as if the increase in the maximum AIA to £500,000 had not been made. In other words, in the example given at paragraph 12, for expenditure incurred before 1 (or 6) April 2014, only expenditure up to the maximum amount of the £250,000 cap can be covered.
14.Paragraph 4 provides the transitional rules for chargeable periods that straddle 1 January 2016, when the maximum amount of the AIA is to return to its previous maximum of £25,000. This rule is similar in its operation to paragraph 4 of Schedule 1 of Finance Act 2013 which was to have applied when the AIA was due to be reduced from £250,000 to £25,000.
15.Paragraph 4(1) explains that the paragraph applies to a chargeable period that begins before 1 January 2016 and ends on or after that date. Such a period is referred to as "the second straddling period".
16.Paragraph 4(2) provides that the maximum allowance for the second straddling period is the sum of each maximum allowance that would be found if:
the period beginning with the first day of the chargeable period and ending with the day before 1 January 2016, and
the period beginning with 1 January 2016 and ending with the last day of the chargeable period,
were treated as separate chargeable periods.
So a company with a financial year chargeable period, from 1 April 2015 to 31 March 2016, would calculate its maximum AIA entitlement for its ‘second straddling period’ based on:
the proportion of the period from 1 April 2015 to 31 December 2015, that is,
9/12 x £500,000 = £375,000, and,
the portion of the period from 1 January 2016 to 31 March 2016, that is,
3/12 x £25,000 = £6,250.
The company’s maximum AIA for this straddling period would, therefore, be the sum of (a) + (b) = £381,250.
17.Paragraph 4(3) provides that, for expenditure incurred in the part of the chargeable period falling on or after 1 January 2016, the maximum allowance is the maximum calculated in accordance with (b) in paragraph 16 above, that is, £6,250 in our example. This rule does not affect the business's maximum AIA entitlement for the second straddling period as a whole (which, in the example given in paragraph 16 above, is £381,250), simply the amount of expenditure incurred on or after 1 January 2016 that may be covered by AIA.
18.For example, if the company in our example at paragraph 16 above, incurred no qualifying expenditure in the period 1 April 2015 to 31 December 2015 and then spent, say, £30,000 in the period 1 January 2016 to 31 March 2016, the maximum AIA available to that company for expenditure in that particular part period would be limited to £6,250.
19.Paragraph 5 provides the rules explaining the operation of the AIA where businesses have to share a single AIA (where restrictions apply). This rule is similar in its operational effect to paragraph 5 of Schedule 1 of Finance Act 2013
20.Paragraph 5(1) provides that paragraphs 1 to 4 of the Schedule also apply for the purposes of determining the maximum allowance in relation to businesses that are required by CAA to share a single AIA, in a case where one or more of those businesses has a chargeable period that straddles either the start of 1 (or 6) April 2014 or end date of the temporary increase, being 31 December 2015. This provision is stated to be subject to sub-paragraphs (2) and (3).
21.Paragraphs 5(2) provides that, for the purposes of determining the maximum allowance in cases where businesses must share a single AIA, and one or more of the affected businesses has a straddling chargeable period, only chargeable periods of one year or less may be taken into account, and, if there is more than one such period, only that period which gives rise to the maximum allowance.
22.For example, four companies in a company group with different chargeable periods of 12 months ending in the financial year 2015-2016 would be required to share a single AIA. In the following example, their individual maximum amounts are as shown in the third column of the table. However, their overall maximum, single AIA (to be shared amongst the group) would be the greatest maximum allowance, in this example, £500,000. So if, say, £500,000 were allocated to Company A, nothing further could be allocated to other companies in the group in this particular year. Alternatively, if, say, £200,000 were allocated to Company C, and the balance of the greatest maximum was to be allocated to Company D, no more than (£500,000 - £200,000 =) £300,000 could be allocated to D in this particular year.
Example: a related group of companies with chargeable periods ending in the transitional year: 1.04.15 to 31.03.16
| Company | Chargeable period ending on | Maximum time-apportioned AIA |
|---|---|---|
| A | 31 December 2015 | £500,000 |
| B | 31 January 2016 | £460,417 |
| C | 29 February 2016 | £420,833 |
| D | 31 March 2016 | £381,250 |
23.Paragraph 5(3) contains a special rule which relates only to businesses carrying on a trade, profession or vocation within the charge to income tax, as these businesses can have a chargeable period of up to (but no more than) 18 months. Limiting a business's chargeable period to a year ending at the same time as it actually ends, stops an increased AIA being shared with related businesses.
24.Paragraph 5(4) provides that where an AIA has to be shared the special rules in relation to unincorporated businesses with chargeable periods longer than 12 months are not affected by the transitional provisions in paragraph 5. Paragraph 5(4) preserves the right of the business with the long chargeable period to see if it is entitled to look back to an earlier chargeable period to see if there is potentially an unused AIA entitlement in that earlier chargeable period.
Part 2
25.Paragraph 6 amends Section 7 of Finance Act 2013 which increased the maximum AIA from £25,000 to £250,000 for a period from 1 January 2013 to 31 December 2014.
26.Paragraph 6(2) amends the period of temporary increase in the AIA limit to £250,000 from two years beginning with 1 January 2013 to a period beginning with 1 January 2013 and ending with the specified date given by Paragraph 6(3) of 31 March 2014 for corporation tax purposes or 5 April 2014 for income tax purposes.
27.Paragraph 6(4) provides for an ancillary amendment to paragraph 7(2)(a).
28.Paragraph 7 amends Schedule 1 of Finance Act 2013 which provides transitional rules for chargeable periods that straddle 1 January 2013 or 1 January 2015.
29.Paragraph 7(2)(a) limits the application of transitional rules for a chargeable period which spans 1 January 2013 to those chargeable periods which span 1 January 2013 and end on or before the specified date of 31 March 2014 for corporation tax or 5 April 2014 for income tax which is given by Paragraph 7(2)(b). Transitional rules for a chargeable period which begins before 1 January 2013 and ends after 31 March (or 5 April) 2014 are given by Paragraphs 1 and 2 of Schedule 1 of Finance Act 2014 (see above).
30.Paragraph 7(3) omits paragraph 4 of Schedule 1 of Finance Act 2013 which dealt with a chargeable period which straddles 1 January 2015, which is replaced by Paragraph 4 of Schedule 1 of Finance Act 2014 providing transitional rules for the chargeable period which straddles 1 January 2016.
31.Paragraph 7(4) provides ancillary amendments to paragraph 7(2) and 7(3).
Background Note
32.Since 1 April 2008 (CT) and 6 April 2008 (IT) most businesses, regardless of size, have been able to claim the AIA on their expenditure on plant or machinery, up to a specified annual amount each year (subject to certain conditions mentioned below). With effect from 1 April 2012 (CT) or 6 April 2012 (IT) the maximum amount of the AIA was reduced from £100,000 to £25,000 for qualifying expenditure incurred on or after those dates.
33.Following an announcement in the 2012 Autumn Statement, Finance Act 2013 temporarily increased the maximum amount of the AIA from £25,000 to £250,000 for the period 1 January 2013 to 31 December 2014.
34.At the Budget 2014 the Chancellor announced his intention to extend the period of the temporary increase to 31 December 2015 and further increase the maximum amount of the AIA to £500,000 from 1 (or 6) April 2014.
35.These temporary increases are designed to stimulate growth in the economy by providing an additional, time-limited incentive for businesses (particularly small and medium-sized businesses) to increase, or bring forward, their capital expenditure on plant or machinery.
36.Businesses are able to claim the AIA in respect of their expenditure on both general and “special rate” plant and machinery. The AIA is effectively a 100 per cent upfront allowance that applies to most qualifying expenditure (with expenditure on cars being the most important exception) up to an annual limit or cap. Where businesses spend more than the annual limit, any additional qualifying expenditure is dealt with in the normal capital allowances regime, entering either the main rate or the special rate pool, where it will attract writing-down allowances (WDAs) at the 18 per cent or 8 per cent rates respectively.
37.Because the AIA is a generous relief there are certain restrictions. It is available to:
Any individual carrying on a qualifying activity (this includes trades, professions, vocations, ordinary property businesses and individuals having an employment or office).
Any partnership consisting only of individuals, and
any company (subject to certain restriction).
38.In the case of companies in a group there is one AIA available to all the companies in the group.
39.In the case of singleton companies, each receives its own AIA unless, for example, it and another company are under common control. In cases where companies are under common control (for example, two companies owned by the same individual) each company will still be entitled to a separate AIA, unless they are engaged in “similar activities” or share the same premises in a financial year.
40.The rules provide that a company is related to another company in a financial year and, separately, that an unincorporated qualifying activity is related to another qualifying activity in a tax year, if either or both of:
The shared premises condition, and/or
the similar activities condition,
are met in relation to the companies or the qualifying activities with chargeable periods ending in that financial year, or that tax year, as the case may be.
41.The rules provide businesses with almost complete freedom to allocate the AIA between different types of expenditure. For example, they may allocate it first against any expenditure on “integral features”, qualifying for the lower 8 per cent “special rate” of WDA.
