Talking to your clients - Temporary increase in AIA

There was a lot of publicity not that long ago about the massive increase in the AIA. And then the announcement in the Budget of yet another increase! However, as we know, the increases are not always that straightforward.

The new rates apply to expenditure incurred on or after 6 April 2014 (1 April 2014 for companies) and before 1 January 2016. The rate will then revert to £25,000 (maybe!).

Periods straddling 1/6 April 2014

Where a chargeable period which begins before 1/6 April 2014 and ends on or after that date, the maximum allowance for the straddling period is the sum of each maximum allowance that would be found if:

• so much (if any) of the straddling period as falls before 1 January 2013;

• so much of the straddling period as falls on or after 1 January 2013 but before 1/6 April 2014; and

• so much of the straddling period as falls on or after 1/6 April 2014

were each treated as separate chargeable periods. However, this is subject to the rules below.

Example 1

A company with a chargeable period from 1 June 2013 to 31 May 2014 would calculate its maximum AIA entitlement based on:

(a) the proportion of a year from 1 June 2013 to 31 March 2014, that is 10/12 x £250,000 = £208,333;

(b) the proportion of a year from 1 April 2014 to 31 May 2014, that is, 2/12 x £500,000 = £83,333.

So, the company's maximum AIA for the straddling period would be the total of (a) + (b) = £291,666.

Straddling period beginning before 1 January 2013

Businesses within the charge to income tax can have a chargeable period of up to (but no more than) 18 months. Therefore the legislation needs to cover the scenario where the straddling period begins before 1 January 2013 and straddles 6 April 2014. In so far as expenditure is incurred in the part of the chargeable period falling before 1 January 2013, the maximum allowance is calculated as if the AIA was £25,000.

Example 2

A business with a chargeable period of 18 months from 1 December 2012 to 31 May 2014 would calculate its maximum AIA entitlement based on:

(a) the proportion of the period from 1 December 2012 to 31 December 2012, that is, 1/12 x £25,000 = £2,083

(b) the proportion of the period from 1 January 2013 to 5 April 2014, that is, 15/12 x £250,000 = £312,500; and

(c) the proportion of the period from 6 April 2014 to 31 May 2014, that is, 2/12 x £500,000 = £83,333.

So, the company's maximum AIA for this first straddling period would be the total of (a) + (b) + (c) = £2,083 + £312,500 + £83,333 = £397,917.

However, the allowance for expenditure actually incurred pre 1 January 2013 is limited to 18/12 x £25,000 = £37,500.

In addition, in respect of expenditure incurred before 1/6 April 2014, the maximum allowance is the maximum ignoring the increase to £500,000.

Example 2 continued

The allowance for expenditure incurred pre 1/6 April 2014 is 1/12 x £25,000 + 17/12 x £250,000 = £356,250.

Straddling period beginning on or after 1 January 2013

Where no part of the straddling period falls before 1 January 2013, then for expenditure incurred before 1/6 April 2014, AIA is limited to the allowance that would have been due if the increase to £500,000 had not taken place.

Example 3

A company has a chargeable period from 1 January 2014 to 31 December 2014. The maximum AIA entitlement is:

(a) the portion of the period from 1 January 2014 to 31 March 2014, that is, 3/12 x £250,000 = £62,500; and

(b) the portion of the period from 1 April 2014 to 31 December 2014, that is, 9/12 x £500,000 = £375,000.

The company's maximum AIA for its first straddling period would therefore be the total of (a) + (b) = £62,500 + £375,000 = £437,500.

However, the allowance for expenditure actually incurred pre 1/6 April 2014 is limited to £250,000.

Make sure your clients appreciate that £500,000 is not always the answer!