Reduction to Annual Investment Allowance on expenditure on plant or machinery from January 2020
Annual Investment Allowance Reduction from January 2021
Since 1 April 2008 (Corporation Tax) and 6 April 2008 (Income Tax) most businesses, regardless of size, have been able to claim the Annual Investment Allowance (AIA) on qualifying expenditure on plant or machinery, up to a specified annual amount each year.
The limit for the Annual Investment Allowance (AIA) was increased temporarily from £200,000 to £1,000,000 from 1 January 2019 to 31 December 2020.
This means that after 1 January 2021, only qualifying capital expenditure amounting to £200,000 per annum will qualify for AIA.
All businesses that invest heavily in plant, equipment, machinery etc. need to act quickly and plan their expenditure accordingly to ensure they maximise the availability of the enhanced AIA up to 31st December 2020.
For accounting periods that straddle the change, a pro rata calculation of the maximum entitlement is required during the transitional period.
If a company has a 12-month accounting period from 1 April 2020 to 31 March 2021:
- The proportion of AIA entitlement falling between 1 April 2020 to 31 December 2020 would be 9/12 of £1,000,000 = £750,000;
- The proportion of AIA entitlement falling between 1 January 2021 to 31 March 2021 would be 3/12 of £200,000 = £50,000; and
- So, the maximum AIA in this example would be £750,000 + £50,000 = £800,000.
The above example clearly illustrates the fact that there is a large disparity in the maximum allowance, depending on the claim period, and so the timing of expenditure is critical.
How Does This Work?
Taking the example above, a business purchases two items of plant costing £400,000 each. One is purchased on 30 September 2020 and one on 28 February 2021. At first sight, the total expenditure is £800,000 and so the full amount qualifies for AIA at 100%.
However, as the second item of plant was purchased in the period after 31 December 2020, the claim for that period is restricted to the AIA limit applying to 1 January 2021 – 31 March 2021 – ie restricted to £50,000.
Therefore the AIA claim for the period is £400,000 for the first machine plus £50,000 for the second = £450,000. The remaining £350,000 of expenditure will qualify only for writing down allowance.
If however, both machines had been purchased before 31 December 2020, the maximum £800,000 AIA could have been claimed.
Many businesses may have deferred decisions about purchasing capital equipment this year because of financial uncertainties created by the COVID-19 pandemic. Tax savings are only relative if the equipment is actually needed.
Purchasing unnecessary equipment can put a business in a worse cashflow position than the tax saved, as it will have to have paid out (in full/finance via HP/lease) for the asset purchase.
Although the timing of a purchase may make no difference in the long run to the amount of expenditure which qualifies for tax relief, it can make an enormous difference to how quickly that relief is received and the contribution that the relief can make to the cash flow of a business.
Available capital allowances can be impacted by other factors that can affect the date the expenditure is deemed to be incurred for AIA purposes, for example stage payments.
It may therefore be important to take advice before you take action.
Please contact our business services team if you would like to talk through a purchase decision.