Changes to the Annual Investment Allowance – what you need to know

Changes to the Annual Investment Allowance – what you need to know

If you are planning to make a capital purchase, it could pay to act soon. Changes introduced a year ago may mean the difference between thousands of pounds in savings or a substantially higher tax bill. Here’s what you need to know.

All businesses can claim capital allowances on items used to carry out their operations – known as plant and machinery.

All kinds of assets fall into this category, including tools, construction equipment, factory fixtures, office equipment and lorries, vans and cars.

A more exhaustive list can be found here.

Under the usual set of circumstances, the full cost of these items except for cars can be deducted from your taxable projects using the Annual Investment Allowance (AIA).

Although fixed at £200,00 per annum from January 2018 the allowance has been temporarily increased to £1 million per year between 1 January 2019 and 31 December 2020 as a means of boosting investment. I guess we can thank Brexit for that.

Where businesses spend more than the annual limit, any additional qualifying expenditure will attract relief under the less generous writing down allowances regime, entering either the main rate or the special rate pool, where it will attract writing-down allowances at the main rate or special rate respectively.

That means the full cost of any items up to the value of £1 million can be deducted from your profits subject to special ‘transitional rules’. These rules are not easy to understand, so we have illustrated how they work below.

Where a business has a chargeable period that spans either of:

  1. A) The operative date of the increase to £1,000,000 on 1 January 2019, or
  2. B) The operative date of the reversion to £200,000 on 1 January 2021, transitional rules will apply.

Where a business has a chargeable period that spans 1 January 2019, the maximum allowance for that business’s transitional chargeable period comprises 2 parts:

  1. A) The AIA entitlement, based on the £200,000 cap for the portion of the period falling before 1 January 2019.
  2. B) The AIA entitlement, based on the temporary £1,000,000 annual cap for the portion of the period falling on or after 1 January 2019.

The business’s maximum AIA for this transitional chargeable period would, therefore, be the total of (A) + (B).

EXAMPLE

Where a business has a chargeable period from 1 July 2018 to 30 June 2019, the maximum AIA for this period would be £600,000. This is calculated as follows:

  1. A) The proportion of the period from 01 July 2018 to 31 December 2018: 6/12 x £200,000 = £100,000
  2. B) The proportion of the period from 1 January 2019 to 30 June 2019: 6/12 x £1,000,000 = £500,000

Therefore

£100,000 + £500,000 = £600,000.

As this example illustrates, the timing of the purchase is essential if the business is to receive maximum relief. Businesses should therefore plan capital allowance purchases in advance to take full advantage of the temporary £1 million limit.

For professional support making capital allowance purchases and claims, please get in touch with our expert David Hibbert today. Simply call on 01482 326916 or email at davidhibbert@smailesgoldie.co.uk