Annual Investment Allowance and Reduction of £1m Cap

Back in November 2020, the Government extended the £1,000,000 cap on Annual Investment Allowance (AIA) until 1 January 2022.

From 1 January 2022 the cap reduces to £200,000. AIA is a valuable tax break that provides relief for capital expenditure (such as equipment) in the year of purchase.

Most businesses will feel that £200,000 is enough, however there is a twist in the tale for the accounting period which includes the date 1 January 2022.

If, for example, you have a January year end – the rules state that your AIA cap is only £16,667 for qualifying expenditure incurred between 1 January 2022 and 31 January 2022. For a March year end it is £50,000 for qualifying expenditure between 1 January 2022 and 31 March 2022.

The example below uses a January year end to highlight the two restrictions for 2022

Restriction for the whole account’s year:
£1,000,000/12 months x 11 months + £200,000/12 months x 1 month = £933,334

However, for the period 1 January 2022 to 31 January 2022 there is an added restriction:
£200,000/12 months x 1 month (1 January 2022 to 31 January 2022 year-end) = £16,667

Please click here to view the restrictions for all year end dates in 2022.

An important thing to note is that we are no longer reliant on just AIA to claim tax relief for capital expenditure.

For example, if a limited company buys brand new equipment it is very likely that they will meet the conditions for the new “Super-deduction” and there is no cap on this. Click here for more details.

However, the Super-deduction is not available for second-hand equipment and sole traders and partnerships are not eligible.

If you depend on AIA to get tax relief on your capital expenditure and you know the restrictions outlined in this blog will cause you an issue in 2022, do get in touch with us. Careful planning (for example, by purchasing before 31 December 2021 or after your 2022 year-end) may alleviate any concerns you have.

The period in which expenditure is deemed incurred for AIA will become even more important in the next year, so do get in touch for tax advice on these rules.

If you do exceed the AIA cap, do not be unduly alarmed as you will still get tax relief for equipment. Instead of getting the tax relief in the year of purchase though, the relief will be spread over many years. Not ideal for cashflow.

If you have any queries regarding the above, do contact your normal M+A Partners contact, speak to me on 01953 452077 or email mary-anne.sargeant@mapartners.co.uk