The government’s £1 million investment incentive: Annual Investment Allowance

Could your business benefit from the investment incentive at this time of economic and political uncertainty?

aia

Official figures published in February 2019¹ evidence that UK business investment fell by almost 4% in the final three months of 2018 compared to the same period a year earlier. This is likely to increase the productivity issues facing British industry at present. However, the government has taken action in the form of the Annual Investment Allowance (AIA). This is designed to stimulate capital expenditure, especially among the country’s small and medium-sized enterprises (SMEs).

About the incentive

In his Budget last October, Chancellor of the Exchequer Phillip Hammond unveiled a dramatic increase in the AIA – the amount of capital investment that businesses can offset against tax in any given financial year.

Hammond announced that the previous annual limit of £200,000 would be temporarily raised to £1 million for 2019 and 2020. This means firms can now invest significant amounts in plant, machinery and other business critical assets that will help them improve their productivity, stimulate growth and help enhance their profitability thanks to the additional tax relief on offer.

For businesses, investment is generally of a replacement or new capacity nature. Whichever it is, Santander Asset Finance (SAF) can help your business make the most of this tax benefit. Although the future may be uncertain, this tax incentive won't be available forever, so it's important to consider whether your business could benefit from additional investment. If you decide that it's right for you, then SAF can help.

Getting the timing right

Businesses which have financial years that don’t run from 1 January to 31 December may need to act quickly to maximise the benefit of the higher allowance.

For example, a firm with a 31 March year-end would be entitled to a pro-rata AIA for the first three months of this year of £250,000, with the remaining £750,000 allowance for the rest of 2019 becoming available from 1 April.

Similarly, a company with a 30 June year-end would be able to offset £500,000 of investment against tax in the first half of this year while benefiting from a further £500,000 allowance in the second half.

This temporary change in the tax rules gives companies a significant incentive to identify the type of investments that have the potential to transform their business, and to kick-start the planning process that is an essential element of any capital expenditure project.

Clean Air Zones: An investment opportunity

It’s worth noting that, for businesses in many parts of the UK, the two-year uplift in the AIA will coincide with the introduction of Clean Air Zones as well as London’s Ultra Low Emissions Zone. Restrictions or daily charges on vehicles which don’t meet the latest emissions standards are due to be introduced in cities such as Birmingham, Leeds and Southampton from 2020 at the latest.

For firms based and doing business in these areas which are concerned about the potential impact of the new regulations, the increase in the AIA could be timed perfectly to enable them to offset against tax some or all the capital investment required to bring their fleets up to date.

But whatever your investment plans, this window of opportunity will close at the end of next year. So now is the time to start having discussions with accountants and finance providers to assess what kind of expenditure might be most valuable to your firm, as well as what the most appropriate way of funding those investments could be.

How asset finance can help you

You can take advantage of the AIA whether you pay cash for assets or whether you choose to borrow and use asset finance.

The AIA can be applied to investment in a range of areas, from plant and machinery to IT equipment and software, as well as commercial vehicles – although spending on company cars, buildings (excluding integral features), land and existing or gifted assets is not covered by the allowance.

Asset finance, in the form of hire purchase or leasing, provides you with medium term financing at an instalment level that your business can afford. Further, the borrowing is secured against the asset(s) that you acquire. Therefore, we won’t be asking you to put more than you already have at risk. Asset finance facilities are locked in and your only obligation will be to meet the repayments as and when they fall due. These can be tailored to suit your cash flow and can be paid out of the incremental revenues and profits that the assets acquired generate.

To find out more about how SAF can help your business speak with one of our Relationship Directors today. We’re represented nationally and can visit you on site to explain what we do, how we do it and answer any questions that you may have.

For more information please contact Mark Eastwood, National Head of Sales Santander Asset Finance at mark.eastwood@santander.co.uk.

1. https://uk.reuters.com/article/uk-britain-economy/uk-economy-at-weakest-since-2012-as-brexit-global-worries-bite-idUKKCN1Q00V2

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