Capital Allowances vs the Annual Investment Allowance: Timing the Claim
You are the tax adviser to Kestrel Engineering Ltd, a UK company with a 31 March year end. In the year ended 31 March 20X5 the company made the following capital purchases:
- New CNC machine: £180,000 (plant and machinery, main pool)
- Second-hand delivery van: £22,000 (not a car; main pool)
- New company car (petrol, 110g/km CO2): £30,000 (special rate pool)
- Office refurbishment (integral features): £45,000
The company has taxable trading profits before capital allowances of £210,000. It has £12,000 of brought-forward main pool expenditure and £8,000 of brought-forward special rate pool expenditure. The Annual Investment Allowance (AIA) limit is £1,000,000. The main pool writing-down allowance is 18% and the special rate pool is 6%. The company wants to minimise its tax bill for the year.
1. Calculate the maximum capital allowances available for the year ended 31 March 20X5, allocating the AIA optimally.
Read the worked answer
Step 1 - Identify pools and AIA eligibility.
- Main pool: CNC machine £180,000 + van £22,000 + b/f £12,000 = £214,000
- Special rate pool: car £30,000 + b/f £8,000 = £38,000
- Integral features (£45,000) are special rate pool assets, but they qualify for AIA.
Step 2 - Allocate AIA optimally. AIA is £1,000,000, far above total additions (£180k + £22k + £30k + £45k = £277k), so all additions can be covered by AIA. The b/f pools are not eligible for AIA.
Step 3 - Compute allowances.
- AIA on additions: £180,000 + £22,000 + £30,000 + £45,000 = £277,000
- Main pool WDA on b/f £12,000 × 18% = £2,160
- Special rate pool WDA on b/f £8,000 × 6% = £480
Total capital allowances = £277,000 + £2,160 + £480 = £279,640.
(If AIA were restricted, you would allocate it first to assets with the lowest WDA rate - i.e. special rate pool assets - to maximise the allowance.)
2. Calculate the taxable profit and explain why the company might not want to claim the full AIA, given the profits available.
Read the worked answer
Taxable profit: Profits before allowances £210,000 − capital allowances £279,640 = loss of £69,640.
Why not claim the full AIA?
- Allowances cannot create a tax refund on their own. The company cannot use more allowances than it has profits in the year; the excess becomes a carry-forward (or, for certain losses, a carry-back) rather than an immediate cash saving. Claiming the full AIA now 'wastes' the timing benefit.
- Better to spread the claim. By restricting the AIA claim to bring allowances down to, say, £210,000 (matching profits), the company pays nil tax this year and carries the unused AIA capacity forward to offset future profits - which may be taxed at a higher rate or where the cash saving is more valuable.
- Loss relief rules for companies are restrictive; a carried-forward loss is only usable against future profits of the same trade, so a large loss now may not be fully utilisable for years.
- Cash flow: the tax saved is only realised when profits are offset; deferring the claim to a year with higher profits may produce a larger, earlier cash benefit.
Recommendation: Restrict the AIA claim so total allowances ≈ £210,000, preserving AIA capacity for future years, and confirm the treatment with the company's accountant.