The Annual Investment Allowance (AIA) can be utilised against expenditure on qualifying plant and machinery and integral features to obtain 100% tax relief in the year of expenditure. It has fluctuated between £25,000 and £500,000 since its introduction in April 2008, but the allowance was fixed at £200,000 from January 2016.
In the recent Budget, the Chancellor announced a temporary increase of the AIA to £1m for two years from 1 January 2019. Whilst the additional upfront tax relief is welcome, the detail behind how the increase (and subsequent return to £200,000) is applied gives rise to some traps for the unwary.
Whenever the AIA changes, there are transitional rules to set out how the maximum AIA for an accounting period is to be determined where the accounting period straddles the increase or decrease in the AIA. These transitional rules also limit the amount of AIA that can you can utilise in the part-period before or after the change.
The maximum AIA that can be claimed in the whole accounting period is calculated by pro-rating the allowance. For example, a company with a March 2019 year end will be entitled to 9/12ths of £200,000 and 3/12ths of £1,000,000, so a total of £400,000.
However, the amount of AIA available for expenditure in the period before the temporary increase to £1m is restricted to the amount of AIA that would have been available had there been no increase, so £200,000. However, this does not change the total amount that is due for the whole period, so if £200,000 is utilised in the pre-change period only the remaining £200,000 is available for expenditure in the second part-period.
The rules for calculating the maximum expenditure in the period following the return to £200,000 are even more stringent. In this period, the amount of AIA is restricted to the amount that would have been available in that part-period had there been no increase. For example, a company with a March 2021 year end will be entitled to AIA for the whole period of £800,000 (9/12ths of £1,000,000 and 3/12ths of £200,000) but can only utilise £50,000 of this against expenditure incurred in the period 1 January 2021 to 31 March 2021.
As you can see from the above examples, it’s all in the timing. So if you are expecting to incur significant capital expenditure on plant and machinery or integral features in the next three years, we advise you to consider the timing of that work.
To compute the total AIA that will be available for each of your accounting periods over the coming years, and the restriction that will apply to the part period before or after the change in the AIA, complex calculations are needed. We can help with these, and any other questions you have about the allowance. Please get in touch with your usual BKL contact or use our enquiry form.