If you are planning any significant capital expenditure you should ensure it is before 31 December 2020 to maximise tax relief. The current £1m Annual Investment Allowance (AIA) limit is only available for qualifying expenditure incurred in the two calendar years – 2019 and 2020. This has meant that in the 12 month accounting period ending in 2020 you could spend up to £1m on qualifying plant and machinery for use in your trade and received tax relief on the full amount.
The AIA will however revert to £200,000 on 1 January 2021 and businesses with non-calendar year ends could see their own effective AIA drop even lower than they might expect.
If you have a 31 December year end, then the position is fairly straightforward, as your December 2020 year end will coincide exactly with the decrease in the limit. You will have an AIA limit of £1m for the year ending 31 December 2020, and a limit of £200,000 for the year ending 31 December 2021.
However, if you have any year end other than 31 December, things become much more complicated. Due to how the AIA limit is calculated for years which span the decrease on 1 January 2021, businesses could end up with their effective AIA limit restricted to significantly less than £200,000.
Where your business year end is anything other than 31 December the maximum AIA for the whole 12 month period is calculated by aggregating the time-apportioned amount of each of the £1m and the £200,000 limits.
For example, 31 March 2021 year end
A business with a 31 March year end will have a chargeable period which runs from 1 April 2020 to 31 March 2021. The overall AIA available to them for this period will be £800,000, being the total of the following two amounts:
• From 1 April 2020 to 31 December 2020 = £750,000 (nine months’ worth of the £1m limit)
• From 1 January 2021 to 31 March 2021 = £50,000 (three months’ worth of the lower £200,000 limit)
However, whether or not the full £800,000 limit is available will depend on when the company incurs its qualifying expenditure within the year to 31 March 2021. That is because, the maximum AIA for expenditure incurred in the three month period from 1 January 2021 will be restricted to £50,000 (calculated as above), without taking into account the level of expenditure in the nine months to 31 December 2020.
This means that, in a worst case scenario, if the business didn’t buy any qualifying assets in the run up to 31 December 2020 their AIA for the year ending 31 March 2021 will only be £50,000.
Our advice is for businesses to make any significant upcoming Plant & Machinery purchases before 31 December 2020 (bringing forward expenditure if possible) to ensure they benefit from the increased AIA available up to 31 December 2020. Businesses should be aware that the normal rule is expenditure is incurred on the date on which the obligation to pay becomes unconditional, there are certain exceptions to this rule and you should talk to us for advice.
Many of us will have hoped that an announcement would have been made in the Autumn Statement that the increased AIA would have been maintained in 2021. However with the announcement that the Autumn Statement has been cancelled, any change to the planned AIA of £200,000 for 2021 is now very unlikely.
We are happy to discuss the above with you and ensure that where possible you maximise tax relief available. Please contact Angela Keery, Tax Director on 028 9032 3466 or email firstname.lastname@example.org