Discontinuance of trade and the AIA
The Annual Investment Allowance (AIA) allows businesses to write off 100% of the cost of qualifying P&M, up to the allowed maximum, against taxable profits. It can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let business.
A recent First-tier Tribunal case examined the entitlement of Mr Keyl, a self-employed air conditioning engineer to the AIA in connection with the purchase of a new van in July 2008. In this case the taxpayer was advised by his accountant to incorporate his business. This was because of the taxpayer’s growing turnover and due to the financial protection of setting up a limited company.
However it appears that the accountant did not fully consider the impact of the incorporation on his client’s claim for AIA. The AIA legislation includes a specific provision that relief will be denied in the year in which a trade discontinues. HMRC argued that the taxpayer was therefore not entitled to claim relief as the taxpayer’s self-employed status had been permanently discontinued.
The Tribunal had to decide whether the taxpayer’s trade was permanently discontinued in the year ended 31 March 2009. It was clear that a new limited company (CC Ltd) began to trade from 1 April 2009. However, the taxpayer argued that some maintenance and warranty work after 1 April 2009 for equipment sold in his own name was done in his own right and was not related to the business of CC Ltd. The Tribunal rejected this argument and was clear that‘in the scintilla of time before midnight on 31 March 2009 Mr Keyl’s trade ceased. In the scintilla of time after midnight, CC Ltd commenced its trade’.The Tribunal decided that the taxpayer did permanently discontinue his trade in the chargeable period and was therefore not entitled to AIA for the purchase of a new van in the chargeable period.
The case provides an important reminder that no AIA is available where expenditure is incurred in the chargeable period in which the qualifying activity is permanently discontinued. Careful consideration should always be given where a decision to incorporate is being considered.