We previously highlighted a planned reduction in the Annual Investment Allowance (AIA) from the temporary rate of £1,000,0000 to £200,000 from 1 January 2021. In a move that will be welcomed by recovering businesses, the Government has announced the extension of the availability of the increased AIA to 31 December 2021.
The AIA provides a 100% tax deduction for capital expenditure on qualifying plant and machinery. It can be a particularly valuable relief on the acquisition or refurbishment of commercial buildings, although it cannot be used against expenditure qualifying for the newer Structures and Buildings Allowances.
The amount of the allowance has varied significantly since it was introduced; it has been as low as £25,000 and as high as the current temporary rate of £1,000,000, which was introduced in January 2019 to stimulate business investment in the economy.
The extension gives businesses planning capital expenditure longer to consider ways they can take advantage of the higher amount while it is available. If the transitional rules come in as expected at the end of 2021, businesses with an accounting period straddling the calendar year end will still need to take particular care as relief can be unexpectedly restricted.
The maximum AIA that will be available to a business with a 31 March 2022 year end, for example, would be £800,000 being nine months of the £1,000,000 annual limit (£750,000) and three months of the £200,000 annual limit (£50,000). The three month period to 31 March has its own restriction of £50,000, however, which is why timing of expenditure is very important.
If that business incurred £400,000 of qualifying expenditure in the nine months to 31 December 2021 and £400,000 in the three months to 31 March 2022, the restriction on the second notional period would mean that only £450,000 of expenditure could be covered by the AIA.
Businesses with later year ends could well find their AIA limits reduced to even less than £200,000 if they do not incur enough of their qualifying expenditure before 31 December 2021. For example, a business with a 30 September 2022 year end would have its AIA reduced below the £200,000 annual limit if it did not incur at least £50,000 of qualifying expenditure in the first three months of its financial year.
Businesses should consider how they can take advantage of this valuable extension, and what the transitional rules could mean for them.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice from their financial adviser before making financial decisions. Sourced from Gov.uk.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.