The annual investment allowance (AIA) gives a 100% deduction for tax  purposes for the cost of plant, equipment and certain fixtures in  buildings, which qualify for capital allowances. The AIA has an annual  cap. This started at £50,000 in 2008, was increased to  £100,000 by the previous government, and was cut to  £25,000 in April 2012 by the current incumbents.

Now the AIA cap will temporarily increase to £250,000  for expenditure incurred in the two years from 1 January  2013. Equipment bought on and after 1 January 2015 will be  subject to the reduced AIA cap of £25,000, unless the Chancellor  of the day has another change of mind. Expenditure that qualifies for  capital allowances, but which exceeds the available AIA cap for the  business is given tax relief at the rate of 18% or 8% per year,  depending on the nature of the item purchased.

The AIA cap for accounting periods that end on 31 December 2013 and 31  December 2014 will be £250,000, fair and square. But where your  business has an accounting period that straddles 1 January 2013, the  calculation of the AIA cap is complicated. Say your accounting period  ends on 31 March 2013. You need to split the accounting period (for  AIA purposes only), into:

a. 1 April 2012 to 31 December 2012 (portion of £25,000 AIA);  and 

b. 1 January 2013 to 31 March 2013 (portion of £250,000  AIA).

 The maximum AIA for the business is the sum of the portions of the AIA  cap due for each of those sub-periods a) and b). However, the  expenditure must also be spread over those two periods to gain the  maximum advantage from the AIA. The business cannot spend its maximum  AIA in the period from 1 January 2013 to 31 March 2013.

The complications do not stop there, as there is protection for  businesses that have already spent their maximum AIA of £25,000  in 2012. Please ask us to check how much the AIA cap will be for your  business before you purchase any expensive equipment.