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Planning for the AIA reduction on the 1st January 2016

The annual investment allowance (AIA) was introduced in April 2008 as a tax incentive for investment in new equipment, machinery, etc.

It allows businesses, regardless of size, to deduct the full cost of plant and machinery (excluding cars) from their profits in the year in which they purchased it, rather than being spread over a number of years.

Currently, the AIA applies to expenditure up to an annual limit of £500,000 and, while this was due to reduce to £25,000 from 1st January 2016, the Summer Budget announced that the AIA would only be reduced to £200,000 from that date.

If your business has a December year end, then it is straightforward calculating the AIA for each accounting period but if you have a non-December year end then the maximum AIA you can claim will be a hybrid of the old and new limits. For example, for a business with a year-end of 31st March 2016, the AIA will be calculated as £500,000 * 9/12 plus £200,000 * 3/12 or £425,000 in total. However, the maximum allowable expenditure in the period from 1st January to the year-end date cannot exceed the calculated maximum for that period (i.e £200,000 * 3/12 = £50,000). Therefore, to gain the maximum benefit of the AIA, you should look to buy any major plant and equipment by 31st December2015.