The Treasury has confirmed that the Annual Investment Allowance (AIA) is to be extended for an additional year. The temporary £1m cap was originally due to revert to £200,000 on 1 January 2021 but now businesses can continue to claim up to £1m in same-year tax relief through the AIA for capital investments in plant and machinery assets until 1 January 2022.
This tax incentive has been implemented in a bid to counter the current downturn businesses are facing by encouraging investment and growth in UK businesses. If your business is looking to make any significant asset investments then with the temporary increase in place 2021 could be the time to do it to make the most of this temporary tax incentive.
What is AIA?
The AIA is a relief given through the Capital Allowances computation to give UK Businesses a 100% Corporation Tax deduction for capital expenditure on any AIA “qualifying” assets.
“Qualifying” assets can include plant and machinery, computers, office equipment, vans, lorries and more. It can be a particularly valuable relief on the acquisition or refurbishment of commercial buildings (although it cannot be used against expenditure which qualifies for the newer Structures and Buildings Allowances.)
The amount of the allowance has varied significantly since it was introduced; some years it has been as low as £25,000 but the current rate of £1,000,000 is the highest it has ever been. It was introduced in January 2019 to stimulate business investment in the economy and is labelled as “temporary” such that it is likely it will fall back to the previous level of £200,000 from 2022.
Why is the temporary increase something I need to consider?
The extension gives businesses that are planning capital expenditure longer to consider ways by which they can take advantage of the higher amount while it is available. If the transitional rules come in as expected at the end of 2021, businesses with an accounting period that straddles the calendar year end will still need to take particular care as relief can be unexpectedly restricted.
The maximum AIA that will be available to a business with a 31 March 2022 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 2021 and £400,000 in the three months to 31 March 2022, 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 2021. For example, a business with a 30 September 2022 year end would have its AIA reduced below the £200,000 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 how they can take advantage of this valuable extension, and what the transitional rules could mean for them.