Are You Making the Most of the Temporary Increase in the Annual Investment Allowance?

Posted by Barth Consulting Ltd on 3rd December 2020 -

Updated: The £1m Annual Investment Allowance has been extended for another year.  To 31 Dec 2021

At last the Government has announced a year long extension to the Annual Investment Allowances (AIA).
It was due to drop from £1 million down to £200,000 on 1 January 2021.
This extended upfront support from the treasury will be welcomed by businesses who are investing in plant and machinery. Some tax certainty and a simplified system for claiming tax relief during these difficult times is good news indeed.

Find out more here: Government extends £1 million tax break

The Annual Investment Allowance (AIA) has been temporarily increased to £1 million.  What more of an incentive does business need to encourage investment in new plant and machinery, fixtures, fittings and equipment?

When the AIA was introduced in 2008 the cap was £25,000 so it went largely unnoticed by all except the auditors. It gets reset in the budget by the Chancellor, who has been tinkering with it ever since. The current limit will fall back down to £200,000 on 1 January 2021.

The AIA is part of your capital allowances and allows you to deduct up to £1m from your profits before tax, thus reducing your tax bill. This 100% in year tax write-down will apply to all your qualifying plant and machinery or special rate expenditure, excluding cars, up to the £1m limit.

Integral features, which includes the pricey heating, air conditioning, lighting power, alarms and lift type systems are usually allocated to the special rate pool, attract a lower write-down rate of 6% per year. The tax savings will be received slowly over many years. You can speed up the flow of savings if the AIA is used on these assets first.

Expenditure on general plant in excess of the AIA has a write-down of 18% per annum so the flow of savings is a bit quicker than integral features.

If businesses want to take full advantage of these first-year allowances, they should plan the timing of their purchases of big-ticket items that attract capital allowances so that they get the benefit of the cash savings as soon as possible.  Large, multi-faceted construction projects will require a detailed analysis of all the consultant’s fees, site set up costs, the building works, move costs and equipment purchases all of which are likely to span more than one financial period.

If your accounting period falls either side of 31 December period, you will have to calculate the AIA available on a time apportionment basis. Bizarrely the rules differ between 2019 and 2021 so seek advice from your accountant as to what your actual allowance is.

The tax savings clock is ticking!