Businesses could save tax by bringing forward capital purchases

Businesses can deduct the full value of an item that qualifies for Annual Investment Allowance (AIA) from their profits before tax.

But did you know that from 1 January 2019 to 31 December 2020, the allowance has been significantly increased from £200,000 to £1 million?

The measure is designed to provide an incentive for businesses to increase or bring forward capital expenditure on plant and machinery, meaning businesses can lower their tax burden while boosting productivity and operational capacity.

To take full advantage of the special rate, this is what you need to know.

How does the AIA work?

Regardless of size, businesses can claim 100 per cent upfront AIA relief on expenditure on plant and machinery up to the specified annual allowance. Relief, however, is only available on “qualifying expenditure”.

According to HM Revenue & Customs (HMRC), this includes items that you keep to use in your business, the costs of demolishing plant and machinery, parts of a building considered integral (known as ‘integral features’), certain fixtures (such as fitted kitchens or bathroom suites), and alterations to a building to install plant and machinery.

Company cars, however, do not qualify for AIA relief, alongside items “owned for another reason before you started using them in your business” or “items given to you or your business”. Writing down allowances should be used for these items instead.

The writing down rate is essentially the going market rate for that item, rather than the full 100 per cent upfront purchase cost.

What is the current allowance and when does it run to?

The AIA has been temporarily increased to £1 million from 01 January 2019 for two years. It is estimated that this will directly benefit the 30,000 UK businesses who exceed the standard £200,000 qualifying expenditure limit each year.

When can I claim?

To qualify for AIA relief during the special rate period, the item must have been bought in the two years from 01 January 2019. HMRC says the purchase date is defined as the date you “signed the contract” if payment is due within four months, or when payment’s due if it’s due more than four months later.

How do I claim?

AIA relief is claimed on your annual tax return.

What happens if I overspend?

Any additional qualifying expenditure will attract relief under the normal capital allowances regime.

Be aware of transitional rules

Transitional rules apply to businesses whose chargeable periods span either side of the special allowance period. The exact rules are as follows:

Where a business has a chargeable period that spans either of:

  • the operative date of the increase to £1,000,000 on 1 January 2019; or
  • the operative date of the reversion to £200,000 on 1 January 2021, transitional rules will apply.

Where a business has a chargeable period that spans 01 January 2019, the maximum allowance for that business’s transitional chargeable period comprises two parts:

  1. a) the AIA entitlement, based on the £200,000 cap for the portion of the period falling before 1 January 2019
  2. b) the AIA entitlement, based on the temporary £1,000,000 annual cap for the portion of the period falling on or after 1 January 2019

The business’s maximum AIA for this transitional chargeable period would therefore be the total of (a) + (b).

For example, a business whose period runs from 1 July 2018 to 30 June 2019 would calculate its allowance as 6/12 x £200,000 = £100,000 and 6/12 x £1,000,000 = £500,000, resulting in an allowance of £600,000 over the 12-month period.

Due to the tricky transitional period rules, businesses should carefully time capital purchases to make full use of the uprated allowance and additional tax relief.

For more information about the Annual Investment Allowance, or for support making a claim, get in touch with our expert team today.