In the Autumn Budget, the Chancellor announced a number of changes to capital allowances including:
- a fivefold increase in the amount of Annual Investment Allowance (AIA) available
- a reduction in the writing down allowance on the special rate pool
- the introduction of a new allowance for structures and buildings.
An increase in the AIA from 1 January 2019
The maximum AIA has been set at £200,000 per annum for expenditure incurred since 1 January 2016. The AIA provides a 100% tax write off against profits for expenditure incurred on qualifying plant and machinery by businesses and owners of commercial property. It is not available for expenditure on cars.
For expenditure incurred on or after 1 January 2019, the maximum AIA is increased to £1,000,000. This is for a two-year period and the AIA is set to revert to £200,000 for expenditure incurred on or after 1 January 2021.
On the face of it, deferring expenditure until after 31 December 2018 seems an easy and straightforward decision to make. However, care is needed in some circumstances if the accounting year end of your business is not 31 December.
As the accounting periods of many businesses span this date, a pro rata calculation of the maximum entitlement is required. Where a business has an accounting period that spans 31 December 2018, the maximum allowance for that period is potentially the sum of:
- the maximum AIA entitlement based on the £200,000 annual cap for the portion of the accounting period falling before 1 January 2019; and
- the maximum AIA entitlement based on the £1,000,000 cap for the portion of the accounting period falling on or after 1 January 2019.
A business makes up its accounts to 30 June annually. For the year to 30 June 2019, the limit is calculated as follows:
July 2018 – December 2018
6/12 x £200,000 = £100,000
January 2019 – June 2019
6/12 x £1,000,000 = £500,000
Total = £600,000
Does it matter when the expenditure is incurred in the accounting period?
The example above does not mean that the business can spend £600,000 at any time in the accounting period and claim AIA on that amount. For expenditure incurred before 1 January 2019, legislation will be introduced to limit the maximum figure available. The maximum allowance will be the AIA that would have been due for the whole of the accounting period to 30 June 2019, if the increase in AIA had not taken place. The maximum annual limit if no change had occurred is £200,000 for a 12-month period and so this is deemed to be the limit for the six months to 31 December 2018.
In the example, if the business had spent £225,000 in the first six months of the accounting period relief would be limited to £200,000. The business can spend £400,000 (£600,000 – £200,000) in the six months to 30 June 2019 which will qualify for AIA.
If the business has not incurred any expenditure in the first six months, £600,000 will be available for expenditure between 1 January and 30 June 2019.
If the business is planning capital expenditure in excess of this figure, then it may be more beneficial to defer the expenditure (or part of the expenditure) until after the end of the current accounting period as the full £1,000,000 AIA may be available. In the example, the business could spend £1,000,000 in July 2019.
On 1 January 2021, the AIA will revert to £200,000. This will mean that the same company will have an AIA in later periods as follows:
Accounting period to 30 June 2020 – £1,000,000
Accounting period to 30 June 2021 (special prorate rules apply) – £600,000
Further points to be aware of
- In some situations, a business may not be entitled to the AIA as computed above as the AIA limits may need to be shared with other businesses which are under common ownership.
- There are special rules for determining the date of when capital expenditure is incurred for tax purposes in some circumstances. Please contact us if a contract is being signed with a credit period of more than four months or a hire purchase agreement is being entered into.
Changes to the writing down allowance (WDA)
The rate of the WDA on the special rate pool is being reduced. The rate of 8% will reduce to 6% from 6 April 2019 for unincorporated businesses and from 1 April 2019 for companies. No changes are being made to the rate of WDA on the main rate pool which is 18%.
The special rate pool includes expenditure on higher emissions cars (currently those with emissions in excess of 110 g/km) and integral features (essentially building fixtures which qualify for capital allowances such as air conditioning) which have not been relieved by other allowances.
Transitional rules apply for accounting periods which span 1 or 6 April 2019. The broad effect of the rules is to give a hybrid rate for the transitional period between 8% and 6%. Using the example year end of 30 June 2019, the business would be entitled to a WDA of 7.5%. This is calculated as 9 months at 8%, being the period to 31 March 2019 and 3 months at 6%, being the period from 1 April 2019 to the end of the accounting period.
Structures and Buildings Allowance (SBA)
The government is to introduce capital allowances on certain structures and buildings, the SBA. The government’s stated aim of this change is to stimulate investment in commercial activity, specifically on new commercial structures and buildings and the improvement of existing structures and buildings, including converting existing premises to qualifying use.
Under the rules businesses chargeable to either income or corporation tax will be able to claim relief over a 50-year period, as a deduction from their profits at an annual straight-line rate of 2%. The fine details of the rules will be set by Regulations but are expected to provide for allowances to be available for contracts entered into on or after 29 October 2018, on the construction, renovation or conversion of a building. Where a building has mixed commercial and residential use, partial relief may be available.
What to do
The increase in AIA is positive for businesses whilst the reduction in the WDA is not. Only limited rules and conditions are currently available in respect of the new SBA. This means careful planning may be required to ensure that capital allowances are maximised. If you would like to discuss these changes in more detail, please do get in touch.
This publication has been prepared by Robinson Reed Layton LLP. It is to be treated as a general guide only and is not intended to be a comprehensive statement of the law or represent specific tax advice. No liability is accepted for the opinions it contains, or for any errors or omissions. All rights reserved.