The recent increase to the Annual Investment Allowance (AIA) is a welcome change to the capital allowance regime. EEF has been campaigning to increase capital allowances for many years.
In the Autumn Statement the Chancellor announced that the Annual Investment allowance will to be increased tenfold – from £25,000 to £250,000 – for two years beginning 1 January 2013. This change comes at a time when confidence is low, uncertainty is very high and there are lots of things weighing against investment.
What does this mean for manufacturers?
The easiest way to look at how this change will impact manufacturers is by looking at the following example. Take the example of a manufacturer who is planning on buying two new machines in 2013 each costing £250,000 bringing the company's total capital investment to £500,000.
Under the current policy, the manufacturer would have been able to expense £110k of depreciation from the investment to lower the company's taxable profit. The new policy will allow the company to expense £295k of depreciation. As shown in the table below, the new policy will save the company over £40,000 more in tax in the year when the new machines are bought than under current policy. This would be an instant boost to cashflow which a firm could then use to reinvest and grow – not an insignificant amount of money for many firms.
This policy is a definite positive move to support investment and one that is needed in the current environment. But the change is not at the scale of change that we were campaigning for - 100% capital allowances for a period of two years. A new AIA of £250,000 will cover the average annual investment of over 98% of all companies. This also needs to be understood in the context of total capital investment – only 30-35% of total capital investment is made by this group of companies. The impact of this policy change could have been greater - a higher allowance would have captured a greater share UK investment and benefited more companies.