Capital Allowances

30th September 2019 by Jonathan Wingfield

Following the 2018 budget where it was announced that the Annual Investment Allowance (AIA) has been temporarily increased from £200,000 per year to £1,000,000, meaning more tax relief can be obtained on qualifying capital expenditure, now may be the time to make the investment into your business that you have been putting off. AIA is available for most common asset purchases such as machinery, vans, tools, office equipment and integral features of buildings. Where you have more bespoke capital investments, it is worthwhile speaking with your accountant to find out what may be eligible for relief.

The increased limit applies between 1 January 2019 and 31 December 2020, after which it is expected that it will return to £200,000. As such, if you are planning on investing more than £200,000 into new assets, it may seem a straightforward decision to do this before 31 December 2020. However, like most things in tax, it is not quite that straight forward and if you have an accounting year that straddles 31 December 2020, care must be taken as to when you incur the expenditure in order to obtain the most tax relief. 

Take for example a common year end of 31 March - under the current rules, up to £1,000,000 can be spent on qualifying assets in the year to 31 March 2020 and full tax relief obtained. However, in the following year to 31 March 2021, you could only get full relief on up to £800,000, as calculated below:

01/04/20 - 31/12/20  £1m x 9/12 =  £750,000 
01/01/21 - 31/03/21  £200,000 x 3/12 = £50,000 
   Limit for the period
 £800,000

 

To add an extra complication, timing of the expenditure is also import, as to obtain the maximum AIA of £800,000 you would need to spend the full £800,000 in the period to 31 December 2020, or £750,000 in the period to 31 December and £50,000 in the three months to March 2021. If you simply spent £800,000 in March, you would be restricted to only £50,000 of AIA, meaning you would not get full tax relief in the year on £750,000. This would instead be given over more than 25 years.

It is therefore key that if you are planning to exploit the increased AIA limit, you time your purchases carefully. A table below shows the transitional amounts for year ends that straddle 31 December 2020, as an indicator as to what AIA is available before and after this date.

Short Life Assets

Often forgotten, it is worth noting that where the AIA limit is fully utilised, making a “short life asset” election can help maximise relief. Ordinarily, relief on qualifying expenditure in excess of the AIA limit is given annually at a rate of 18% on a reducing balance basis in the main pool. However, if you purchase an asset that you expect to dispose of within 8 years for little value, it can be beneficial to make the election that creates a separate pool for the asset. 
Making the election means that relief is still given annually at 18% on the same basis as it is in the main pool, but if the asset is then sold within 8 years of purchase, you can set against your income the difference between the pool value and the sale proceeds, thereby accelerating the tax relief when compared to just having it in the main pool.

If you have fully utilised your AIA and a short life asset election doesn’t work for you, then it may be sensible to consider finance lease options. I will look at these further in the next article.

Year
end: 

AIA
available before
31 Dec 2020

 AIA
available after
1 Jan 2021

 Maximum AIA 
available
   £  £  £
 31/12/2020  1,000,000  -  1,000,000
 31/01/2021  915,301  16,940  932,240
 28/02/2021  838,356  32,329  870,685
 31/03/2021  753,425  49,315  802,740
 30/04/2021  671,233  65,753  736,986
 31/05/2021  586,301  82,740  669,041
 30/06/2021  504,110  99,178  603,288
 31/07/2021  419,178  116,164  535,342
 31/08/2021  334,247  133,151  467,397
 30/09/2021  252,055  149,589  401,644
 31/10/2021  167,123  166,575  333,699
 30/11/2021  84,932  183,014  267,945
 31/12/2021  -  200,000  200,000

 

For more information please contact Jonathan Wingfield.

 
 

Author

Jonathan Wingfield

Jonathan Wingfield

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