Tristan Watkins, UK country manager for BNP Paribas LS said: “Acting now will allow for lead times of several months on large and complex orders such as customised machinery.
“BNP Paribas estimates that delaying and missing the December 31 deadline for investments could cost a business a saving of up £389,500 from its next tax bill. From 1 January, the value of the AIA is expected to fall by 95% to £25,000.”
Watkins points out those businesses that want to take full advantage of the current tax benefits available for major capital investments and still keep cash flow healthy can choose leasing rather than outright purchase. They will be able to claim the AIA for investments as long as the item is in use on their premises by the end of December, and will not need to have made all the payments by that date.
He added: “Delaying decision making on major investments could prove to be very expensive.
“Major capital investments such as a complete IT hardware and systems refit, a combine harvester for a farm, or large-scale excavation equipment for a construction business cannot just be bought off the shelf, and will easily exceed the £25,000 limit that the Annual Investment Allowance is expected to fall to.
“If they are planning a major investment, businesses will need to get talking to suppliers now, and will generally need to have placed an order by the summer in order to ensure that their investment qualifies for the £500,000 AIA relief that is available now.”
The last reduction in AIA saw £1.5billion fall in amount of tax relief claimed on capital spending.
BNP Paribas LS has urged the UK government to use the forthcoming Budget to keep the AIA at its current higher level indefinitely. It points out that the AIA has played a crucial role in encouraging businesses to make very significant capital investments. Previous reductions in the limit for the AIA have had a major impact on the amount of relief claimed.
Watkins added: "After the AIA was cut by 75% from £100,000 to £25,000 for the 2012/13 tax year, the value of relief claimed fell by 21% from £7.2billion to £5.7 billion.
“Even a couple of years ago businesses were clearly using the AIA to help fund major investments, not just day-to-day capital spending – which is why its use fell so sharply when the limit was cut.
“Now that the economic recovery is taking root and business confidence is returning, we would expect an even larger number of businesses to be looking to the AIA to transform their prospects.
“The AIA has proved its worth in encouraging business investment. Using the forthcoming Budget to keep it at its more generous level indefinitely could be transformative for many businesses and indeed for the UK economy. It would ensure that businesses can make the investments they need, at the time that makes most sense for their business.”
*For an investment of £500,000, £25,000 would qualify for the AIA at its new limit," he said. "The £475k balance would qualify for writing down allowances at a maximum of 18% - equating to a first year allowance against tax of £85,500."