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Annual investment allowance – making the most of the cashflow advantage

Annual investment allowance – making the most of the cashflow advantage

Monday, 20 July 2020

The Annual Investment Allowance (AIA) gives businesses 100% relief in the period of the addition for plant and machinery and other qualifying expenditure up to a certain limit. From 1 January 2016, the limit was £200,000. However, the Autumn 2018 Budget announced a temporary increase of the limit to £1,000,000 from 1 January 2019 for a two-year period.

The purpose of the temporary increase was to help businesses invest and grow. Given the current circumstances, the Treasury will be keen for this to continue. However, to date, no announcements have been made to indicate any extension of the increased annual investment allowance limit.

The AIA is therefore due to reduce from £1,000,000 to £200,000 with effect for expenditure incurred from 1 January 2021. As we approach the end of the two-year temporary increase period, it’s important to plan ahead and carefully consider the timing of capital expenditure, especially if your business does not have a 31 December 2020 year end.

In these cases, the total AIA available will be calculated by time apportioning the relevant limits. For example, a business with a year ended 31 March 2021 will have total AIA available of £800,000 as calculated below.

9/12 x £1,000,000       

£750,000

The period pre 31 December 2020

3/12 x £200,000           

£50,000

The period from 1 January 2021 through to 31 March 2021

Total AIA

£800,000

 

 

The problem is that the availability of this limit hinges on when the capital expenditure is incurred.

For the second notional period from 1 January 2021 to the end of the accounting period, qualifying expenditure is capped at the proportionate amount of the £200,000 relating to this notional period i.e. for the above example the cap would be £50,000.

To demonstrate, if qualifying expenditure for the year ended 31 March 2021 was as follows:

1 April 2020 - 31 December 2020: Qualifying expenditure £350,000

1 January 2021 - 31 March 2021: Qualifying expenditure £200,000

Although the total qualifying expenditure of £550,000 is below the total AIA available of £800,000, the qualifying expenditure in the second notional period must be capped at £50,000. Therefore, in this case, the maximum annual investment allowance claim would be:

£350,000 + £50,000 = £400,000.

Whilst this will still be very valuable, the point to note is that there is no cap on qualifying expenditure incurred in the first notional period to 31 December 2020. In the example above, if the business planned all expenditure to be incurred pre 31 December 2020 then all costs could have been covered by the AIA and an additional £150,000 reduction in taxable profits would be achieved.

As you can see, careful planning of your capital expenditure in favour of these rules can result in accelerating the capital allowances available, having a positive impact on your cashflow.

These rules apply equally to limited companies, partnerships and sole traders so if you’re intending to make significant capital expenditure, or you require any help with the rule changes, please get in touch with your usual contact at MHA Larking Gowen.

You can find contact details on the Our People section of the MHA Larking Gowen website. Alternatively, call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Jordan Brown

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