Act now or miss out on Annual Investment Allowance, businesses are urged

Lease and hire purchase finance provider BNP Paribas Leasing Solutions has warned that acting now will allow for lead times of several months on large and complex orders such as customised machinery.

The Annual Investment Allowance (AIA) currently means businesses can use a portion of the 500,000 to claim relief against 1 January 2016 corporation tax bills, and use the balance of the allowance to deduct the cost of eligible investments by the end of December from a 2015/16 bill.

Charting its history, the AIA was initially cut from 100,000 to 25,000 by the coalition. However, in a surprise move, chancellor George Osborne increased it ten-fold to 250,000 in 2012 and then doubled it to 500,000 as part of the 2014 Budget.

BNP Paribas calculations indicate that delaying and then missing the 31 December deadline could cost up to 389,500. The last reduction in the AIA was found to have brought about a 1.5bn fall in the amount of tax relief claimed on capital spending.

Tristan Watkins, UK country manager for BNP Paribas Leasing Solutions, emphasised that delaying decision making on investments could be very expensive .

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 of the 500,000 relief that is available now.

Read more about the AIA:

Ahead of George Osbornes last Budget address before the 7 May general election, BNP Paribas Leasing Solutions is calling at him to keep the AIA at its current level indefinitely as it plays a crucial role encouraging businesses to make big capital investments.

BNP Paribas is the second organisation in two days to make public its call for a permanent 500,000 limit. On 15 March, the British Chambers of Commerce (BCC) said making that decision would boost business spending and keep the economic reverie on track.

The BCC said the estimated average cost of its proposal for a permanent AIA would be 963m per year. It believes this could be funded either through a 0.1 per cent reduction to the average annual level of expected government current spending or a reallocation of less than a fifth of the average departmental underspend recorded over the last four years.

Watkins added: 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.

Image: Shutterstock

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