From this week the annual investment allowance (AIA) will reduce to £25,000 per annum for all businesses incurring expenditure on plant or machinery.
The measure will have effect from 1 April for businesses liable to pay corporation tax, and 6 April 2012 for businesses within the charge to income tax.
This means that the requirement to deal with capital allowances for small businesses incurring minimal expenditure will be more straightforward as for most of the affected businesses the AIA of £25,000 would cover all of their capital expenditure.
An industry commentator has said “The Treasury tables show that this is one of the biggest sources of tax revenue next year – not much comfort to businesses trying to grow.”
The measure to cut AIA, which enables businesses to claim full tax relief on most plant and machinery expenditure in the year it is incurred, is part of the package of corporate tax reforms, which includes the phased reduction in the main rate of corporation tax, intended to create a competitive corporate tax system and to support enterprise and long-term economic growth.
AIA is reduced from £100,000 to £25,000 to “refocus the simplification and cash-flow benefits it offers on smaller businesses,” (Treasury comment) they add that smaller business will be less likely to be adversely affected by the reduction in the AIA than larger businesses.
Qualifying capital expenditure above this limit will continue to receive tax relief through capital allowances.