On Monday 29th October 2018, The Chancellor announced in his Autumn Budget that the Annual Investment Allowance (AIA) would temporarily increase from £200,000 to £1m for a two-year period, between 1st January 2019 to 31st December 2020. It was said that the increase would provide businesses with incentive to invest in plant and machinery and receive immediate tax relief on the investment into qualifying expenditure. However, it is vital businesses are aware of the transitional rules that apply where an accounting period spans the operative date of the increase.
Let’s take an example of a business with a 30th June 2019 year end.
As we can see from the table above, the business would be entitled to a maximum AIA of £600,000 for the trading year due to the two different allowances falling under the said trading period; 6 months under the £200,000 allowance totalling £100,000 and 6 months under the £1million allowance totalling £500,000. The two allowances from both partial calendar years are then added together to determine the full AIA for the trading period.
However, due to the transitional rules, AIA will only be allowed on £200,000 worth of qualifying expenditure incurred up to and including 31st December 2018, as this expenditure occurred before the increase took effect.
The potential trap is much bigger for business as the allowance drops back down to £200,000 on 1st January 2021 though!
A business with a 31st March 2021 year end would be entitled to a maximum AIA of £800,000 for the trading year. This is worked out as £750,000 for 9 months under the temporary increased allowance and £50,000 for three months under the £200,000 threshold.
However, the transitional rules mean the maximum AIA’s claimable for expenditure incurred between 1st January 2021 to 31st March 2021 will only be allowed on £50,000! As most businesses tend to make their investments in fixed assets towards the end of the year, they could fall into the trap of buying assets in this part of the year expecting to get relief on £800,000 worth of expenditure when they will actually only get relief on £50,000!
The timing of purchases will be important both around the increase in this allowance and more importantly when the allowance drops back down in January 2021.
For further help and guidance on the temporary AIA increase, please contact Ian Meaburn at firstname.lastname@example.org or on 01923 224411.