The Annual Investment Allowance (AIA) is £1m per annum. The Chancellor announced that in the Budget on 29 October 2018.
This ‘present’ does, however, come with a shelf life. The £1m relief is effective for the period 1 January 2019 to 31 December 2020. And after that it returns to £200,000, so you need to make the most of it while you can.
The AIA was first introduced on 1 April 2008 to accelerate tax relief on spending on the first £50,000 per annum. Since then the threshold has been increased several times by various governments to encourage capital expenditure. From 2016 the level was fixed at £200,000, with the current increase being a two-year temporary increase.
If your accounting period is the same as the calendar year it will be easy to plan your use of the AIA against your expenditure. But if you have a March year end for example, the AIA is time apportioned. So, for the year ended 31 March 2021, the AIA will be £800,000 (i.e. 9/12 x £1m plus 3/12 x £200,000). However, the maximum AIA that can be claimed in the period from 1 January 2021 to 31 March 2021 is £50,000 (i.e. £200,000 x 3/12).
What does this mean for you?
Expenditure incurred after 31 December 2020 won’t be eligible for the AIA at the higher rate. So, to take advantage of this relief you’ll need to make sure the purchase is made in the right timeframe.
The key to helping your business make the most of this transition? Careful planning. As is shown below:* – It was announced in March 2016 that the corporation tax rate will be reduced to 17% from 1 April 2020, however this is dependent on the outcome of the general election on 12 December 2019 and any subsequent Budget announcements after that election. Therefore, the rate currently in force has been used.
The sting in the tail
While the AIA is increased up to the £1m level, other valuable capital allowances have been reduced or removed.
Enhanced Capital Allowances (ECAs) which gave 100% relief in year one for ‘green’ technologies will cease to exist for buildings and equipment from 31 March 2020 (5 April 2020 for unincorporated businesses). Electric cars and charging points will continue to be eligible for 100% relief in year one until 31 March 2021 and 31 March 2023 respectively, but there’s no longer term commitment at this point.
The rate of relief for the special rate pool has dropped from 8% per annum to 6% per annum. A large proportion of expenditure that currently qualifies for ECAs will be treated as special rate expenditure going forwards too. This will add three years to the time it takes to get just 50% of the tax relief available on the capital expenditure, and six years to the time it takes to receive 75% of the tax relief!
If you have any questions or you’d like some advice, speak to your tax adviser.