The clock is ticking for business owners who want to benefit from substantial tax relief on big ticket purchases such as plant and machinery.
December 2020 sees the end of the temporary increase to the Annual Investment Allowance (AIA). This is the 100 per cent upfront allowance that applies to qualifying expenditure up to a specified annual limit, or cap.
So far, the higher AIA has been beneficial to those savvy business owners who have brought forwards capital purchases to take advantage of the temporary £1million allowance.
They have realised the importance of scheduling capital expenditure within the relevant accounting period rather than miss out on the maximum tax relief which AIA can bring.
Anyone else who is mulling over, and can afford, a major spend may want to do so soon, or at least scrutinise their expenditure projections.
Business owners will also want to stay ahead of the “transitional rules” which will come into play for chargeable periods which straddle the end of the temporary increase.
Forecasting the impacts of these transitional rules and allocating allowable expenditure to the
appropriate chargeable period will prevent nasty surprises later – such as discovering that the
higher limit AIA doesn’t apply and that only normal capital allowances would make up the shortfall.
We have kept you updated on the fluctuating levels of AIA for the past few years, but as a short re-cap, the temporary higher AIA £1million limit on qualifying capital expenditure was introduced in the 2018 Budget and became effective from 1st January 2019 for two years.
This period ends on 31st December 2020. The New Year will see the AIA limit reverting to a permanent rate of £200,000 on 1st January 2021.
This is when the transitional rules bite: when a business has a chargeable period which spans the
date of the end of the temporary increase (31st December) its maximum allowance will be made up of the two limits.
These are:
a) The AIA entitlement, based on the temporary £1 million annual cap for the portion of the period which falls before 1st January 2021
b) The AIA entitlement, based on the £200,000 cap for the portion of the period falling on or after 1st January 2021
How transitional rules work
As the example below will show, the transitional rules mean that a company with a 12-month chargeable period from 1st April 2020 to 31st March 2021 will be impacted by a lower entitlement in 2021.
The company will calculate its AIA entitlement based on:
- The proportion of the chargeable period from 1st April 2020 to 31st December 2020 (9/12 x £1million = £750,000)
- The proportion of the period from 1st January 2021 to 31st March 2021 (3/12 x £200,000 = £50,000)
This company’s maximum AIA for the transitional chargeable period would therefore be £800,000.
Beware the trap
The AIA, which can only be claimed in the accounting period in which the asset was bought, is capped at the proportion of the AIA limit which is applicable to each part of the accounting period. So, as (b) in the example above illustrates, no more than £50,000 of the business’s actual expenditure would be covered by its transitional AIA entitlement after 1st January 2021.
Our conclusion
Business owners who have periods which straddle 1st January 2021 need to be mindful of when capital expenditure is likely to be incurred so that they can make use of the maximum
AIA available, for example, any large amounts of qualifying expenditure could be best spent before the end of 2020.
For more information, contact Gill Molloy on Gill.Molloy@championgroup.co.uk or 0161 703 2500.
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