Finance · 31 January 2017

Capital investment plummets in response to allowance scheme cut

The Annual Investment Allowance (AIA) is vital to manufacturers making large and frequent capital investment

The value of tax breaks claimed for by UK company owners for capital investment in new equipment will fall by as much as 15 per cent this year, it has been predicted.

New research, published by Manchester-based business finance marketplace Funding Options, has revealed that capital investment amongst British firms totalled around £3.2bn in 2015/16.

That figure is expected to drop to around £2.7bn this year, as significant cuts to the government’s Annual Investment Allowance (AIA) take effect.

The AIA enables business owners that make capital investment to claim a 100 per cent deduction, on all expenditure that qualifies, from their taxable profits in the year of purchase.

As of January 2016, the amount of expenditure business owners could claim against their corporate tax bills as part of the AIA scheme fell from £500,000 to £200,000.

Amid fears last year of a further lowering of the AIA rate to £50,000 – a 90 per cent cut – the government fixed the amount business owners could claim against their corporate tax bills permanently at £200,000.

The AIA is of use to business owners in industries related to manufacturing, technology or food service, where capital investment is frequently necessary and often expensive. According to Funding Options CEO, Conrad Ford, however, the AIA can offer a lifeline to companies in any sector, particularly smaller firms.

In a statement, Ford said: “[The AIA] is a real boon for all businesses in any industry to enable them to invest in their IT capability or upgrade phone or other office systems to help them run more smoothly and efficiently or purchase other necessary equipment such as trucks or vans.”

A tool proven to be effective at encouraging business growth, the value of the AIA peaked when it was raised to £500,000 in April 2014.

Ford added: “Although the AIA is no longer as generous as it once was, it’s still an essential means of enabling companies to green-light vital investment.

“Businesses that need to purchase or upgrade vital equipment should make use of this year’s allowance before the end of the tax year, so that they still have their full allowance available next year for any further on-going investment requirements.”

Funding Options has found that more and more business owners are exploring alternative finance methods, especially those from small firms who may find it difficult to obtain a bank loan.

Ford went on to say that AIA enables companies to receive exactly the same tax breaks on capital investment made via alternative forms of finance, giving owners the flexibility to structure investments in a way that suits their business.

“[Business owners] can spread the cost and minimise the hit to their balance sheets too,” he said. “With bank lending to fund these sorts of major investments often in short supply, particularly for SMEs, this is essential.”

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Fred Heritage was previously deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London.