In a surprise move, the Chancellor announced that businesses and investors would receive a timely cash boost by increasing the Annual Investment Allowance (AIA) from £200,000 to £1m. Here we explain how businesses can make the most of this two year opportunity.
The AIA has been around for a number of years and the Chancellor for the government of the time has used it as a fiscal tool to incentivise the investment into certain business assets. The value of the AIA has been as low as £25,000, in 2012, to now being announced it will increase from its current £200,000 level to £1m from 1 January 2019.
This should be seen as a great opportunity for businesses and investors to receive a significant amount of cash back on any planned capital investments over the next two years, after which the AIA is expected to return back to £200,000.
Businesses and investors are able to claim the AIA in respect of capital expenditure which qualifies for either general or ‘special rate’ plant and machinery (P&M). It should be noted that the newly announced Structures and Buildings Allowance (SBA) can not be claimed under the AIA. The AIA provides 100% tax relief as an upfront allowance for qualifying expenditure up to a specified annual limit.
For those chargeable periods which straddle 1 January 2019, there are transitional provisions which come into play, which will calculate the revised available AIA limit for each transitional period.
A company with a 12 month chargeable period from 1 April 2018 to 31 March 2019 would calculate its maximum AIA entitlement based on:
(a) the proportion of the period from 1 April 2018 to 31 December 2018, that is, 9/12 x £200,000 = £150,000, and
(b) the proportion of the period from 1 January 2019 to 31 March 2019, that is 3/12 x £1,000,000 = £250,000.
The company’s maximum AIA for this transitional chargeable period would therefore be the total of (a) + (b) = £150,000 + £250,000 = £400,000, although in relation to (b) (the part period falling on or after 1 January 2019) no more than £250,000 of the company’s actual expenditure in that part period would be covered by its transitional AIA entitlement.
Where businesses or investors incur qualifying expenditure, which is greater than that annual limit, then they are able to claim tax relief at the normal Capital Allowance rates.
For those businesses or investors which are to embark on large expenditure projects over the next two years, careful consideration needs to be given, firstly in terms of the level of qualifying expenditure for normal P&M allowances and also at which point in time is the expenditure deemed to have been incurred, as this will dictate the level of the AIA limit to be applied.
Secondly, where the level of qualifying expenditure exceeds your AIA limit, a tax planning point is to allocate the qualifying expenditure which attracts the lowest rate of tax relief i.e. the special rate pool, in order to maximise the tax relief on the remaining P&M qualifying expenditure.
Often overlooked, is the fact that qualifying expenditure also includes the acquisition of second hand assets, which for AIA is deemed to be new expenditure and can be claimed against it. With the purchaser now potentially gaining a faster rate of benefit than the seller, the way in which the benefit is negotiated may change for future deals.
Finally, given the increase to the AIA limit it should ensure that even for perceived smaller capital projects, it is now worth undertaking a detailed Capital Allowances exercise in order to identify qualifying expenditure to generate a tax cash saving by claiming it against the increased AIA.