As anticipated, this year’s budget evoked the typical hue and cry that often follows cuts to public spending coupled with tax rises.

We are all no doubt familiar with the decrease in corporation tax. Some of us will have debated the income tax personal allowance increase and many will certainly have a view on the rise in national insurance for employees. However the Annual Investment Allowance (AIA) is one particular budget item that seems to have escaped without much debate.

The upcoming reduction in the AIA is significant as it will restrict businesses looking to make significant capital expenditure as tax relief will be reduced, which could hinder growth.

The AIA currently stands at £100,000. As of April 2012, this will be reduced to £25,000. In real terms, this means that from April 2012, businesses making annual capital expenditure of £100,000 will lose the ability to reduce their corporation tax by up to £20,000, depending on their profit levels and the applicable rate of corporation tax.

So, whilst businesses are celebrating a reduction in corporation tax they are also likely to be hit by the AIA reduction, which shortens the timeframe in which to claim capital allowances. The phrase ‘robbing Peter to pay Paul’ springs to mind.

There is currently much debate around how government cuts will impact upon the outsourcing industry. Many view it as an opportunity for the outsourcing industry to flourish. Others believe that with the cuts will lead to reduced spend as business begin to scrutinise their overheads more then ever. Either way, the government has made much of its commitment to generating growth within the private sector so the AIA reduction, which prohibits growth, comes as a surprise.

As a provider of IT services that qualify under the AIA, such as the installation and configuration of equipment and the associated operational costs through to managed services and larger outsourcing contracts, we are telling our customers to take full advantage of the current AIA whilst it continues to exist.

Of course, herein lies another problem. Lending restrictions and limited access to finance means that businesses wishing to harness the potential of investment in IT as a tool for growth could face a number of challenges if on-going finance options remain hard to find.

Many companies are offering 0 per cent finance over two or three years, which means that by making strategic investments before April 2012, businesses can offset the effects of a reduced AIA until 2015, maximising the use of the AIA and cash flow management. But will this be enough to offset what amounts to a 75 per cent reduction in an allowance that has helped businesses grow since it was introduced?

I believe that the government’s decision is short-sighted, particularly in a climate where there is more pressure on the private sector to deliver economic growth combined with even less access to capital. More importantly, the AIA is likely to impact on the growth of many businesses – both the outsourcing companies and their clients - that rely on significant capital expenditure, which could affect overall growth of the UK’s economy.

Whilst businesses cannot influence government to reverse this decision they can make plans to limit its negative financial impact. Perhaps the first challenge is to provide this issue with exposure and get businesses thinking about how it affects them. Either way, I foresee the AIA becoming a wider topic of debate amongst the IT industry between now and April 2012.

ADA Technology Services is an IT managed services and co-sourcing specialist. For more information please visit: http://www.ada.co.uk.