Since 1 April 2008 (Corporation Tax) and 6 April 2008 (Income Tax) most businesses, regardless of size, have been able to claim the Annual Investment Allowance (AIA) on qualifying expenditure on plant or machinery, up to a specified annual amount each year.
Where businesses spend more than the annual limit, any additional qualifying expenditure invites relief under the normal capital allowances regime. Additional expenditure will attract writing down allowances at either 18% in the main pool or 6% in the special rate pool.
Reduction in the AIA limit from 1 January 2021
The limit for the Annual Investment Allowance (AIA) was increased temporarily from £200,000 to £1,000,000 from 1 January 2019 to 31 December 2020.
This means that after 1 January 2021, only qualifying capital expenditure amounting to £200,000 per annum will qualify for AIA.
Chargeable periods that span the AIA reduction
Should your business have a chargeable period that spans the end date of the temporary increase on 31 December 2020, transitional rules will apply.
The transitional chargeable period will comprise of two amounts:
- The AIA entitlement based on the £1,000,000 limit for the period falling before 1 January 2021; and
- The AIA entitlement based on the reduced £200,000 cap for the period falling on or after 1 January 2021.
If a company has a 12-month accounting period from 1 April 2020 to 31 March 2021:
- The proportion of AIA entitlement falling between 1 April 2020 to 31 December 2020 would be 9/12 of £1,000,000 = £750,000;
- The proportion of AIA entitlement falling between 1 January 2021 to 31 March 2021 would be 3/12 of £200,000 = £50,000; and
- So, the maximum AIA in this example would be £750,000 + £50,000 = £800,000.
The above example clearly illustrates the fact that there is a large disparity in the maximum allowance, depending on the claim period.
If a company has a total qualifying expenditure of £100,000 for the whole of their chargeable period, but all of this is incurred between 1 January 2021 to 31 March 2021, £50,000 is the maximum amount that can qualify for AIA. In this example, all of the expenditure is post 1 January 2021, therefore the proportion of eligible AIA has to be calculated based on the new, reduced entitlement, regardless of whether an unused allowance remains from the period ending on 31 December 2020.
It is therefore recommended that businesses do not delay in incurring qualifying capital expenditure ahead of 31 December 2020.
Should you have any queries on the above or require any help or support in relation to the AIA reduction, then please either get in touch with your usual M+A Partners contact or email email@example.com and we will be happy to help.