During these challenging times, many businesses are having to defer capital projects rather than bring them forward. This cannot last indefinitely, however; businesses will have to look at strategic investment once again to equip them for the recovery. With the generous £1m allowance due to expire in January 2021, the Annual Investment Allowance (AIA) should be part of their planning.
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. This should be a spur to action for businesses considering capital investment.
The temporary rate is due to revert to the lower limit of £200,000 from 1 January 2021, so there is limited time to take advantage. There are calls for the Government to extend the availability of the increased AIA beyond its planned end date in order to help recovering businesses. Businesses will need to watch closely for any extension, but with no Autumn Budget happening this year it may not be a Government priority.
As such, businesses planning capital expenditure should consider ways they can take advantage of the higher amount while it is available. Businesses with an accounting period straddling the calendar year end need to take particular care as the transitional rules mean relief can be unexpectedly restricted.
The maximum AIA that will be available to a business with a 31 March 2021 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 2020 and £400,000 in the three months to 31 March 2021, 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 2020. For example, a business with a 30 September 2021 year end would have its AIA reduced below the new 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 what the transitional rules mean for them and whether or not they should bring forward capital expenditure in order to prevent AIA entitlement from being wasted. For some businesses, the timing of special rate versus main pool expenditure to maximise the value of the AIA may also be important. If you are about to commit on a capital project in the near future, you really need to bear this substantial tax change in mind.
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. 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 publication.
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.