The annual investment allowance (AIA) allows a 100% allowance for qualifying plant and machinery expenditure incurred in an accounting period up to a specified
annual amount each year. Most expenditure added to the general pool or special rate pool is eligible for AIA, the notable exception being motor vehicles.
AIA was capped at £200,000 per annum up to 31 December 2018. This limit was temporarily increased to £1m per annum for each of the two years ended 31 December
2020, before reverting back to £200,000 on 1 January 2021.
There are transitional rules to deal with the reduction in AIA. These transitional rules can mean that allowances are lost where businesses have an accounting
period that straddles 31 December 2020. The timing of expenditure is therefore important.
The formula to calculate AIA for a period straddling 31 December 2020 is:
(a/12 x £1m) + (b/12 x £200,000)
“a” = number of months in the accounting period that arise before 31 December 2020, and
“b” = number of months in the accounting period that arise after 31 December 2020.
So for an accounting period 1 April 2020 – 31 March 2021 the maximum AIA for the year is:
(9/12 x £1m) + (3/12 x £200,000) = £800,000
So far so good. However, the claim is not so straight forward. Eligibility for AIA depends on the date the expenditure is incurred. There is a further
cap when the limit reduces, that restricts the AIA limit to the proportion of the AIA in that part of the accounting period.
How Does This Work?
Taking the example above, a business purchases two items of plant costing £400,000 each. One is purchased on 30 September 2020 and one on 28 February 2021.
At first sight, the total expenditure is £800,000 and so the full amount qualifies for AIA at 100%.
However as the second item of plant was purchased in the period after 31 December 2020, the claim for that period is restricted to the AIA limit applying
to 1 January 2021 – 31 March 2021 – ie restricted to £50,000.
So the AIA claim for the period is £400,000 for the first machine plus £50,000 for the second = £450,000. The remaining £350,000 of expenditure will qualify
only for writing down allowance.
If however, both machines had been purchased before 31 December 2020, the maximum £800,000 AIA could have been claimed.
What Action Can Be Taken?
When businesses are planning capital purchases in the period up to and around 31 December 2020 and expenditure is anticipated to be up to and above maximum
AIA for the relevant accounting period, purchases should (where possible) be made before 31 December 2020 to maximise relief.
It is important to take advice, as there are other factors that can affect the date expenditure is deemed to be incurred for AIA purposes, for example:
• Financing arrangements
• Stage payments
• Conditional contracts
• Payment terms
The position is also more complex for groups of companies and related businesses.
If you require any further information or assistance on AIA or other capital allowances issues please contact our Tax Partners, Steve Crompton or Lucy
Williams, on the details below: