Capital Allowances – Annual Investment Allowance reduction from January 2021

The Annual Investment Allowance (AIA) provides a tax write off against profits for expenditure incurred on plant and machinery by businesses and owners of commercial property.

Changes to the AIA – key dates

The amount of the AIA was increased to £1,000,000 from 1 January 2019 until 31 December 2020. The AIA will be reduced to £200,000 for expenditure incurred after this date.

What happens if the accounting period of the business straddles the 1 January 2021?

A pro rata calculation of the maximum entitlement is required. The maximum allowance for that period is the sum of:

  • the maximum AIA entitlement based on the £1,000,000 annual cap for the portion of the accounting period falling before 1 January 2021; and
  • the maximum AIA entitlement based on the £200,000 cap for the portion of the accounting period falling on or after 1 January 2021.

Example

A company makes up its accounts to 31 March annually. For the year to 31 March 2021, the limit is calculated as follows:

Does it matter when the expenditure is incurred in the accounting period?

Yes, it does. For expenditure incurred before 1 January 2021, there is a limit to the maximum figure available. The maximum allowance is the AIA in the computation above, namely £750,000.

However, if expenditure is incurred on or after 1 January to 31 March 2021, the maximum amount of relief will only be £50,000.

Alternatively, the business could defer its expenditure until after 31 March 2021. In the accounting period to 31 March 2022, the AIA will be £200,000. However, tax relief will have been deferred for a full year.

Further points to be aware of:

  • AIA it is not available for expenditure on cars.
  • Certain businesses are not entitled to any AIA.
  • 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.

What to do

As can be seen, the timing of the expenditure around 1 January 2021 is critical. If you are in any doubt as to what this change will mean for your business, please get in touch with us as soon as possible.

 

UPDATE

On 12 November 2020 the Government announced that the £1m AIA would remain in place until 31 December 2021.