Temporary increase in the Annual Investment Allowance and the timing of capital expenditure
17th April 2019
The Annual Investment Allowance (AIA) allows a business to claim tax relief on qualifying plant and machinery. Potentially, you can deduct 100% of the cost of the asset from your profits, before working out how much tax you will be required to pay for that financial year. Introduced in 2008, the allowance was created to incentivise investment and boost economic growth. AIA has undergone a number of changes since its inception and most recently, the AIA limit has been temporarily increased to £1m from 1 January 2019, for a two year period.
Whilst the increase means certain businesses will be able to gain additional tax relief on their investments, the change to the allowance also brings about complexities to contend with. If your business has an accounting year end that starts before the date of the increase or extends beyond 1 January 2021, when AIA reverts to £200,000, transitional rules will apply. Therefore, before purchasing any expensive business assets, we recommend that you check to see how these transitional rules will affect you and plan accordingly.
For example, a business with a 30 June 2019 year end would be entitled to a maximum AIA of £600,000 for the trading year due to the two different allowances falling under the said trading period; 6 months under the £200,000 allowance totalling £100,000 and 6 months under the £1million allowance totalling £500,000. The two allowances from both partial calendar years are then added together to determine the full AIA for the trading period. However, due to the transitional rules, AIA will only be allowed on £200,000 worth of qualifying expenditure incurred up to and including 31 December 2018, as this expenditure occurred before the increase took effect.
Similarly, a business with a 31 March 2021 year end would be entitled to a maximum AIA of £800,000 for the trading year. This is worked out as £750,000 for 9 months under the temporary increased allowance and £50,000 for three months under the £200,000 threshold. The transitional rules mean that AIA will only be allowed on £50,000 worth of expenditure incurred in the three month period from 1 January 2021 to 31 March 2021.
The date when capital expenditure is incurred is generally the date when obligation to pay becomes unconditional. Usually, the legal obligation to pay is on, or within a certain time of, delivery of the goods so in most cases expenditure is incurred when the plant and machinery is delivered. However, there is an exception if there is more than four months between the date payment becomes unconditional and the date payment is required (e.g. if a deposit is paid one month after delivery and the balance is paid five months thereafter). Any payment made more than four months after the obligation to pay becomes unconditional could potentially fall into a separate accounting period and/or transitional period. Therefore, to benefit fully from the increased AIA and to navigate the complex transitional rules, the timing of any major capital spend will be crucial.
For further help and guidance on the temporary AIA increase, contact our Tax Team on 01926 422292