Annual Investment Allowance - Making The Most Of The Temporary Increase

Sarah Bradford explains why it is important to plan ahead for capital expenditure to make the most of the temporary increase in the annual investment allowance. 

 

It was announced at the time of Budget 2018 that the annual investment allowance (AIA) would be increased temporarily from its permanent level of £200,000 to £1 million for the two-year period from 1 January 2019 to 31 December 2020. It will revert to £200,000 from 1 January 2021.  

 

Businesses intending significant capital expenditure on plant and machinery in the next couple of years are advised to plan ahead – the timing of the expenditure is important if best use is to be made of the temporary increase in the AIA. 

 

The AIA is a capital allowance which enables a business to deduct 100% of qualifying capital expenditure on plant and machinery up to the level of the available allowance. The 100% nature of the allowance enables the business to receive relief in full for capital expenditure in the year in which the expenditure is incurred. The allowance is available for both income tax and corporation tax purposes, generally benefitting sole traders, partnerships and companies alike. 

 

The AIA has to be claimed, but a claim is optional. The business can choose whether to claim the AIA and, where claimed, the amount of expenditure (up to the AIA limit) in respect of which the allowance is claimed. Any expenditure in respect of which the AIA is not claimed is relieved by means of a writing down allowance. Although the AIA provides immediate relief for expenditure against profits, a claim will not always be beneficial, for example where income is insufficient to utilise the allowance, or where it is expected that the asset will be sold in the near future, triggering a balancing charge. The beauty of the AIA is that it allows businesses to tailor the claim to best suit their needs. 

 

The AIA is only available in respect of ‘qualifying AIA expenditure’. This is basically expenditure which is not excluded expenditure for the purposes of the AIA.  

 

The main category of excluded expenditure is cars (although the AIA can be claimed for expenditure on vans). The AIA is also denied for the chargeable period in which the trade is permanently discontinued (balancing charges and balancing allowances apply instead). 

 

As indicated above, the AIA limit is to be increased to £200,000 to £1 million, from 1 January 2019 to 31 December 2020. It will revert to its permanent level of £200,000 from 1 January 2021.  

 

Transitional provisions apply where the chargeable period spans 1 January 2019 and 31 December 2020. Unless the business has a 31 December year end, the transitional provisions will apply.  

 

The transitional rules mean that where the chargeable period spans 1 January 2019, the period is split into two parts – the period before 1 January 2019 and the period on or after 1 January 2019. The AIA for chargeable periods spanning 1 January 2019 is the sum of: 

 

For a 12 month period, the formula for working out the total AIA entitlement for a chargeable period straddling 1 January 2019 is as follows: 

 

(a/12 x £200,000) + (b/12 x £1,000,000) 

 

Where: 

A further condition applies, which caps the expenditure incurred before 1 January 2019 qualifying for the AIA at the AIA limit applying prior to 1 January 2019 of £200,000. This is the case even if the qualifying expenditure in the whole period is less than the AIA entitlement for that period. 

 

Similar transitional rules apply where the chargeable period spans 31 December 2020. The AIA limit reverts to £200,000 from 1 January 2021. Again, the chargeable period is split into two parts – the period up to and including 31 December 2020, and the period from 1 January 2021 onwards. 

 

The AIA for periods spanning 31 December 2020 is the sum of: 

For a 12 month period, the formula for working out the total AIA entitlement for a chargeable period straddling 1 January 2019 is as follows: 

 

(x/12 x £1,000,000) + (y/12 x £200,000) 

 

Where: 

A further cap equal to the AIA entitlement for the period on or after 1 January 2021 applies to expenditure incurred on or after 1 January 2021. 

 

Autumn Ltd prepares accounts to 30 September each year. It is planning on investing in new plant costing £900,000 and wants to know when the best time to make the investment is, in order to secure the AIA for the full amount of the expenditure. 

 

The AIA limits applying for each of the years to 31 September 2019, 30 September 2020, and 30 September 2021 are as follows: 

 

The year to 30 September 2019 spans 1 January 2019, so the transitional rules apply. 

The AIA limit for that period is (3/12 x £200,000) + (9/12 x £1,000,000) = £800,000. 

A cap of £200,000 applies to expenditure incurred before 1 January 2019. 

 

The year to 30 September 2020 falls wholly within the two-year period from 1 January 2019 to 31 December 2020, for which the temporary AIA limit of £1 million applies. Thus, the AIA limit for the year to 30 September 2020 is £1 million. 

 

The year to 30 September 2021 spans 31 December 2020, so the transitional rules apply. 

The AIA for that period is (3/12 x £1,000,000) + (9/12 x £200,000) = £400,000. 

 

A cap of £150,000 applies to expenditure incurred on or after 1 January 2021. 

 

The following table summarises the AIA available for each of the years: 

To be able to claim the AIA in full for the proposed expenditure of £900,000, the company must incur it in the year to 30 September 2020. 

 

If the expenditure is incurred between 1 January 2019 and 30 September 2019, they will be able to claim the AIA for £800,000 and a writing down allowance for the remaining £100,000. However, if they incur the expenditure before 1 January 2019, they will only be able to claim the AIA for £200,000 (i.e. as the AIA is capped at £200,000 for expenditure before that date), regardless of the fact that the AIA limit for the whole period is £800,000. 

 

As the above example shows, all chargeable periods are not equal when it comes to the AIA. The timing of the expenditure is crucial where it exceeds the AIA permanent level of £200,000 if best use is to be made of the temporary increase in the AIA. 

 

The temporary increase in the AIA provides the chance to receive immediate relief against profits for capital expenditure in excess of £200,000. However, planning ahead is crucial to derive maximum benefit from the temporary increase.