Making the most of your firm's Annual Investment Allowance

POSTED: 24th February 2014
IN: Guides

The economy appears to be back on track, unemployment is falling and reports suggest that businesses are growing in confidence in 2014.

The economy appears to be back on track, unemployment is falling and reports suggest that businesses are growing in confidence in 2014.


With all the opportunity and potential that the coming year is likely to bring, it will be crucial for all companies - from micro enterprises to major corporations - to make the most of every chance to cut costs and get ahead of the competition.

Take, for instance, the Annual Investment Allowance (AIA), a tax break that has been increased from £25,000 to £250,000 until the end of 2014.

This could offer some significant advantages for many businesses, but it seems that many firms are not even aware of the increase.

What is the Annual Investment Allowance?

If you are in business, you are entitled to tax allowances, sometimes called capital allowances, on certain purchases or investments in business assets.

Instead of deducting your exact spending when calculating your profits and losses, you can deduct the allowance. It can cover a range of common business assets, such as office equipment, furniture, machines and tools.

This is the case for everyone from self-employed workers paying income tax to companies liable for corporation tax.

There are various allowances available for spending on what the government categorises as 'plant and machinery'. The majority of businesses can claim an AIA for expenditure on most assets, with the exception of cars.

It is possible that your organisation could claim all of its spending and investment in qualifying items against the allowance.

How has the AIA changed?

HM Revenue & Customs introduced a change to the AIA at the start of 2013, raising the maximum amount companies can claim from £25,000 to £250,000.

The increase will be effective for a temporary period of two years, meaning it will cease to be available at the end of 2014.

Announced in the 2012 autumn statement, the AIA adjustment was among the measures designed to stimulate growth in the economy by providing an additional incentive for businesses to invest in assets.

How can businesses make the most of this opportunity?

Research suggests that many businesses have been encouraged by the improving economic situation to step up investment in 2014.

At the start of the year, the Institute of Directors released a report showing that 41 per cent of company leaders surveyed in the final quarter of 2013 were anticipating higher levels of investment. In the fourth quarter of the previous year, only 29 per cent had this expectation.

Furthermore, a report released by the Federation of Small Businesses (FSB) in December 2013 suggested stronger capital investment plans among small to medium-sized enterprises (SMEs), 23 per cent of which said they were planning to invest in the coming year.

John Allan, national chairman of the FSB, said: "Small firms are creating more jobs and investing in their business and there are encouraging results behind the headline figures, with promising trends evident across the main areas of expansion, investment and employment."

Organisations that are planning investment in the coming year can give themselves a financial boost by making the most of the increased AIA allowance.

Many companies might want to step up their operations by purchasing new equipment or assets, but could be concerned about the drain on their capital reserves.

One possible answer in this case is asset finance, a flexible solution that allows you to make investments and spread the cost of the purchase over the economic life of the asset. Furthermore, it could allow you to release other sources of capital tied up in fixed assets within your enterprise.

Organisations interested in taking out asset finance could go down the hire purchase route, which offers a choice of a fixed or variable rate of interest. The system generally works by the borrower paying the VAT and an initial deposit to begin with, before starting a series of regular repayments.

Another option is leasing, which allows you to possess and use an asset for a fixed lease term. When the initial contract comes to an end, you can continue to use the leased asset in return for secondary period rentals.

With the economy having enjoyed a year of consistent growth and the commercial outlook improving, solutions such as asset finance could prove invaluable during what looks set to be an exciting year for business.

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