The annual investment allowance (AIA) is due to drop from the current £1m down to £200k from 1st January 2021. All businesses that invest heavily in plant, equipment, machinery etc. need to plan their expenditure accordingly and ensure they maximise the availability of the enhanced AIA up to 31st December 2020.

The first step is to calculate the AIA that would be available for two notional periods on either side of the change in rate. Using a year end of 31st March 2021 as an example:

  • Nine months ended 31st December 2020: £1,000,000 x 9/12 = £750,000 (Notional period 1)
  • Three months ended 31st March 2021: £200,000 x 3/12 = £50,000 (Notional period 2)

    Total: £800,000

The following maximums apply

As you can see a total AIA of £800,000 is available to a business for the year ended 31st March 2021. However, the notional period commencing on 1st January 2021 has its own maximum. The maximum AIA for the second notional period (ie 1st January 2021 – 31st March 2021) is the time apportioned amount calculated above. That is, for the year ended 31st March 2021, the following AIA maximums apply:

  • Year ended 31st March 2021: £800,000 (ie £750k + £50k);
  • Three months ended 31st March 2021: £50,000 (time apportioned second notional period as above).

Remember: the maximum AIA for the 12 month period is £800,000; the second notional period amount above at £50k is only to compare the availability of an AIA amount for expenditure incurred during the period 1st January 2021 – 31st March 2021. Don’t get confused by thinking there is an £850k AIA, because there isn’t.

Don’t get confused by thinking there is an £850k AIA, because there isn’t

Here’s an example:

  • A business has a year-end of 31st March 2021;
  • Incurs £600,000 of qualifying expenditure in the nine months ending 31st December 2020
  • Incurs £250,000 of qualifying expenditure in the three months ended 31st  March 2021
  • The restriction on the second notional period (1st January 2021 – 31st March 2021) would mean that only £650,000 of expenditure could be written off immediately using the AIA, being:
  1. Full AIA against the £600k incurred during the period 1st April 2020 – 31st December 2020;
  2. £50k AIA available for the second notional period 1st January 2021 – 31st March 2021 set against the £250k expenditure incurred in that period. Balance of £200k which doesn’t qualify for AIA will have WDAs at 18% set off against.

As you can see, if the total amount of expenditure was incurred during the nine months to 31st December 2020, the company could have offset a full £800K against the capital expenditure, thereby accelerating the tax relief available.

Be careful

Businesses with large capital expenditure in straddling periods will therefore need to be careful. In an extreme situation, a business could end up with an AIA of less than £200,000. As a hypothetical example, where a business with a 31st March 2021 year end incurred all of its capital expenditure of £800,000 between January and March 2021, it could only utilise £50,000 of AIA.

To mitigate the risk of wasting AIAs, business should consider bringing forward capital expenditure prior to 31st December 2020. Please speak to your business advisor to ensure any actions you take are appropriate for your business and won’t be caught by any anti-avoidance rules:

  • Tax savings are only relative if the equipment is actually needed. Purchasing unnecessary equipment can put a business in a worse cashflow position than the tax saved, as it will have to have paid out (in full/finance via HP/lease) for the asset purchase;
  • There are anti-avoidance rules around purchasing equipment to simply gain a tax advantage through capital allowances.

Disclaimer

The information contained herein is of a general nature and is not intended to be received as formal professional advice. Whilst we endeavour to provide accurate information, there can be no guarantee that the information is accurate as of the date it is received, or that it will continue to be accurate in the future, due to legislative changes. It is therefore important that before you act upon any information contained herein you seek appropriate professional advice to take account of your exact circumstances.

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