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Understanding Annual Investment Allowance & Super Deduction

Accounts-Assistant

Changes to the annual investment allowance and the introduction of the super-deduction tax policy have had a big impact on tax allowances. Keep up to date here!

The annual investment allowance (AIA) increase has been a blessing for many businesses when looking to weather the pandemic.

If you’re unfamiliar, the AIA is a tax relief designed to aid British businesses when buying business-specific equipment such as tools and machinery. The AIA enables businesses to claim back 100% of the cost of qualifying plant and machinery in the year of acquisition, lowering your owed tax and encouraging growth. This allowance has been temporarily increased from £200k per annum to £1m during the pandemic in an attempt to help keep businesses afloat.

The AIA is set to revert to £200k on the 1st January 2022. This coupled with new first year allowances (FYA) that came into play on the 1st April 2021 makes for some complicated calculations. Fortunately, we’ve gathered everything that you need to know about new AIA/FYA rules into this handy article!

How to account for changing annual investment allowances

As the AIA is set to revert from the temporary £1m on the 1st January 2022, it’s important to be mindful, especially if your accounting period straddles the date of change.

In this example, imagine a company with a 30th June 2022 accounting period end (APE):

This company’s accounting period will enjoy 6 months of increased allowances, and 6 months at the original rate. This means that from July 2021 – December 2021 they benefit from the £1m allowance, and then £200k from January 2022 – June 2022. Because their APE rolls over between the two years, they must consider the overlap period & account for the reduced rate.

July 2021 – December 2021 – AIA 6/12 x £1,000,000 = £500,000

January 2022 – June 2022 – AIA = 6/12 x £200,000 = £100,000

Total allowances: £600,000.

The example above shows that a company with a 30th June 2022 year end will be entitled to (maximum) £600k AIA. If they incur £600k of expenditure before the AIA is reduced on 1st January 2022, they can claim on the full £600k. However, if they incur the £600k of expenditure in the period 1st January 2022 to 30th June 2022, the max AIA available will be £100k.

Essentially, as they’ve spent half a year in each allowance bracket, they divide all benefits by 2, then add them together. This would need to be adjusted depending on exactly how many months your business has spent with the higher AIA. It’s important to time your expenditure in order to take advantage of increased allowances.

What are the new first year allowances for companies?

In the spring of 2021, Chancellor Rishi Sunak unveiled his new super-deduction tax policy. This deduction allows tax paying businesses to reduce corporation tax (CT) bills. There’s a lot of rules and stipulations that come with this new legislation (as always!), but eligible purchases can now claim tax relief on 130% of an asset’s full value between 1st April 2021 and 1st April 2023.

Take this example:

Let’s say a business purchases an asset for £20,000. Normally they’d be able to claim 19% tax relief on this, meaning that they’d receive a £3,800 tax break.

With the new super-deduction policy, you’d calculate this by using a value of £26,000 (+30%), resulting in a £4,940 tax break

Altogether, this results in a (roughly) 25% super-deduction on all qualifying purchases – a nice bonus!

How to claim the super-deduction

The super-deduction of 130% will be available where expenditure meets all of the following:

  • It is incurred on or after 1 April 2021, but before 1 April 2023
  • It is incurred by a company within the charge to corporation tax
  • It is expenditure on plant or machinery (P&M) which is unused and not second hand
  • It is not within any of the general exclusions in s46(2) CAA 2001 (including expenditure in the APE in which the qualifying activity is discontinued and expenditure incurred on the
    provision of P&M for leasing)
  • It is not special rate expenditure
  • It is not expenditure on the provision of P&M for use wholly or partly for the purposes of a ring fenced trade

Another thing to note: if the expenditure is incurred in the APE that ends on or after 1st April 2023, there will be a reduced super-deduction percentage.

For instance:

If your APE was on the 31st December 2023, the relief would be calculated as follows:

There are 90 days between the 1st January 2023 (the start of accounting period) and 1st April 2023.

90 days/365 days (the entire APE)

90/365 x 30% = 7.4%

7.4% + 100% = a total super-deduction rate of 107.4% for qualifying expenditure in the period up to and including 31st March 2023. There is no limit on qualifying expenditure, and it’s a matter of choice whether AIA/FYAs are claimed. Note that you cannot claim both on the same expenditure.

Shown below are a few hypothetical examples of super-deduction to show how it works in practise:

Example 1

A company incurs £1m of qualifying expenditure and decides to claim the super-deduction. This means the company can deduct £1.3m when computing its taxable profits (a CT saving of £247k).

Example 2 – disposal of assets where super-deduction is made

Where the full 130% FYA is claimed, there will be no remaining expenditure to be allocated to the capital allowances pool, so any disposal will create a balancing charge (BC) on the proceeds.

A company acquires new P&M for £1m in APE 30 Apr 2021. FYA of 130% is claimed. The asset is then sold for £0.5m.

If the sale takes place in APE 30 Apr 2021 or 30 Apr 2022, the BC will be £0.5m x 1.3 = £0.65m.

If the sale takes place in the APE 30 Apr 2023, the BC will be £0.5m x (335/365 x 0.3 = 0.275 + 1) = £637,500.

If the sale takes place in a later year, the BC will be £0.5m.

Example 3

A company buys P&M for £1m in APE 30 Apr 2021. The 130% FYA is claimed on only £0.5m, AIA on £0.3m and the balance allocated to the general pool and written off at 18%.

The asset is sold in APE 30 April 2026 for £0.4m.

The BC will be determined by dividing the amount of the super-deduction expenditure (£0.5m) by the amount of total relevant expenditure, this being the £0.5m + the amount on which any other claim to FYA was made (nil) + the expenditure that was allocated to a capital allowances pool for any chargeable period (including for the APE in which the disposal occurs).

BC in this example is £0.4m x £0.5m / (£0.5m + £0.3m + £0.2m) = £0.2m

Who is eligible for the special rate allowance?

The special rate (SR) allowance is 50%, and is designed to cover integral building features and long- life assets. This will be available where expenditure meets all of the following:

  • It is special rate expenditure from the 6% special rate pool (e.g., long life assets, integral features of buildings, thermal insulation and solar panels)
  • It is incurred on or after 1 April 2021, but before 1 April 2023
  • It is incurred by a company within the charge to corporation tax
  • It is expenditure on plant or machinery which is unused and not second hand
  • It is not within any of the general exclusions in s46(2) CAA 2001 (including expenditure in the APE in which the qualifying activity is discontinued and expenditure incurred on the provision of P&M for leasing)

If assets are disposed of after claiming SR allowance, as with the super-deduction, a balancing charge will arise in the APE in which the disposal falls. The amount will be the relevant proportion of the disposal value.

This is determined by dividing the amount of SR allowance expenditure incurred by two, then dividing that amount by total relevant expenditure in relation to the P&M. For example:

The SR allowance expenditure + expenditure from another FYA claim + expenditure allocated to a capital allowances pool for any APE.

It’s important to note that in order for these FYAs to apply, you need to take note of when the expenditure is incurred, not when it’s treated as incurred (when the obligation to pay becomes unconditional). This means that pre-trading expenditure will not qualify, nor will any expenditure that’s incurred during the period in which the FYA is not in force.

What assets are ineligible for tax relief?

While the qualifying groups are generously wide, there are a handful of assets that aren’t eligible for tax relief. There are separate rules for cars and assets acquired from connected parties.

FYAs exclude expenditure on P&M where the asset is used for leasing/hiring, but the leasing exclusion doesn’t extend to a situation where there’s a provision of a service (e.g., a business supplies an asset with an operator and that asset will be operated by that operator).

Annual investment allowance help and advice with HB&O

That’s a lot of information to take in all at once! It’s easy to get lost in all the AIAs, FYAs and other jargon that’s associated with business tax allowances. At HB&O, we help businesses to cut through the clutter to make the most of their money – we’re here for our clients whenever they need us.

We’ll help to simplify everything. Whether you’re looking for specific advice, or some more general guidance, get in touch with us today.

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