Falling AIA (Annual Investment Allowance) from 1 January 2021
Annual Investment Allowances (AIA) up to 31 December 2020 are available in respect of qualifying capital expenditure up to a £1,000,000 limit, but from 1 January 2021 this limit is being dramatically reduced to £200,000. This means that you will only get 100% tax relief on £200,000 of capital additions in a tax year from then on, as opposed to the £1,000,000 that you currently get.
Normally when planning capital expenditure it makes sense to make the purchase just before your accounting year end rather than just afterwards as this accelerates the point when the corporation tax relief becomes available by 12 months.
But a secondary quirk of how the rules apply when the relief is reduced mean companies should very carefully consider the timing, as the purchase might need to be made before 31 December to obtain full relief.
If your year-end spans the 31 December change, the accounting period has to be split into two periods (pre and post 31 December 2020), and the AIA entitlement for both periods is limited to the proportional entitlement.
For example, an accounting year ended 31 March 2021 will be able to claim a 100% tax deduction on qualifying expenditure up to £800,000. This would be made up of £750,000 for the period 01/04/2020 – 31/12/2020 (£1,000,000 apportioned to 9 months) and £50,000 for the period 01/01/2021 – 31/03/2021 (£200,000 apportioned to 3 months). Any qualifying expenditure in excess of those apportioned amounts for each period will only get tax relief at 19% per year on a reducing balance basis.
AIA’s are available to all businesses regardless of size, although this annual limit is shared by companies in a group. The amount of relief ultimately depends on your accounting year end and what you have spent during the year so far. There are also rules that determine when the expenditure qualifies for the relief, which is generally when the asset is brought into use, even if this is before it has been fully paid.
If you are considering significant capital expenditure in the near future and you would like some advice on the tax relief available, please do not hesitate to get in contact with us. You can call us on 01243 782 423 or head to our contact form!