How to maximise relief from the temporary increase in Annual Investment Allowance

10/09/2019

In late 2018, HMRC announced that the Annual Investment Allowance (AIA) would increase on 1 January 2019 from £200,000 to £1m for a period of two years. Though this news may have sounded irrelevant to most smaller businesses, in fact there will be significant implications for capital expenditure planning for many businesses that are worth looking into.

There is a balancing act for all small businesses between cash reserves and investment in Fixed Assets to support future business growth. Many companies leave significant capital outlay on assets until they are nearing a financial year end. This allows them to see the company’s cash position and their likely Corporation Tax liability before making a decision on whether to invest in more assets.

From 1 January 2019 to 31 December 2020, AIA is now set at £1m per year, so investment in qualifying fixed assets up to £1m in each calendar year will be fully tax deductible on the date of purchase.

If your year end is 31 December, the impact of the amended AIA rate on your expenditure planning is straightforward.

However, if your year end is not 31 December, this news from HMRC will make it worth changing how you approach your capital expenditure planning over the next two years.

What the Annual Investment Allowance announcement means

In the Year to 31 March 2019

During this period, capital expenditure remained straightforward as there was no time for extra planning. You would have received an allowance of £400,000* for the year ended 31 March 2019. Whilst the total allowed is £400,000, you might have missed out on AIA if you spent more than £200,000 in the period to 31 December 2018, but as the annual total was previously £200,000 anyway, this wouldn’t have had an impact on your decision making.

*£200,000 x 9 out of 12 months plus £1m x 3 out of 12 months

Between 1 April 2019 and 31 March 2020

During this period, you will receive the full £1m allowance. This is the perfect time to schedule in any planned capital expenditure that business finances will allow.

From 1 April 2020

However, from 1 April 2020 onwards, care over the timing of the expenditure is required to avoid the pitfall of this change to AIA.

The rate is due to revert back to £200,000 during the financial year ended 31 March 2021; this is where the problem may arise.

Between 1 April 2020 and 31 December 2020, any capital expenditure made in this period will be allowable up to a total cost of £750,000 (i.e. £1m x 9 out of 12 months). However, in the period from 1 January 2021 to 31 March 2021, you would only get relief on further capital expenditure of £50,000 (i.e. £200,000 x 3 out of 12 months).

Whilst the total AIA therefore appears to be £800,000, only the first £50,000 of expenditure incurred after 1 January 2021 will qualify for AIA. Therefore, you need to ensure that all purchases are concluded before 31 December 2020 if significant investment in assets is being made, rather than waiting until nearer your year end to make that asset purchase.

How Prydis can help

If you think these changes might affect your business, please get in touch with your client manager to find out how Prydis can assist you.

Prydis has a strategic approach to managing the performance of your wealth that stretches beyond corporate tax planning advice. With our in-house expert lawyers, accountants and wealth managers, we can offer you assistance with everything from investment and pensions advice to cash flow forecasting.

Get in touch to find out more about your options, whether you’re seeking investment in your business or raising funds for your next asset purchase: call us on 01392 432431 or email us at mail@prydis.com.

Hayley Dunn

This article was written by Hayley Dunn

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