24 January 2020 | Taxation
The AIA – the annual investment allowance – will drop to £200,000 at the end of 2020. If your accounting year crosses that date, then you can expect the new transitional rules to unexpectedly restrict your entitlement further. Are there any steps can you take to work around this? (Spoiler alert: yes)
The annual investment allowance (AIA) is a specific type capital allowance that gives you a deduction for 100% of qualifying expenditure. That means almost all types of equipment, other than cars, bought by you. There are a few exceptions to this general rule.
The maximum amount of expenditure which can qualify for the AIA is usually £200,000. This was went up to £1 million from 1 January 2019 until 31 December 2020. There are transitional rules to work out the AIA for an accounting period which spans one of the change dates, i.e. 1 January 2019 or 31 December 2020. The previous changes are continued, and the new rules are broadly similar except that there is one important and potentially troublesome difference.
The old rules calculated the AIA for the entire accounting period, and compared to the capital expenditure for the same period.
The formula for working out the AIA for any accounting period which spans 31 December 2020 is arithmetic. The definition is (a/12 x £1,000,000) + (b/12 x £200,000). Where “a” is the number of months in the accounting period falling on or before 31 December 2020, and b is the number of months after 31 December. Unlike the calculation for 2019, the maximum amount of expenditure qualifying for the AIA is capped to the proportion of the AIA limit applicable to each part of the accounting period.
Company A’s next accounting year runs from 1 April 2020 to 31 March 2021. It has planned to renew some vehicles and equipment over the twelve months. As it expects to spend around £180,000 the directors assume there will be no problem in claiming the AIA. They assume that because it’s less than the temporary limit of £1 million and the normal limit of £200,000. But the transitional rules could prevent this.
Here’s the trap. The AIA for expenditure in the period 1 January to 31 March 2021 is capped proportionate to the normal amount, i.e. 3/12 x £200,000, which is £50,000.
The old rules would have given you an allowance of £750,000 + £50,000 = £800,000. That is the maximum you would get relief for in the year to 31 March 2021.
The changed rules match the available allowance to the actual spend in each period.
If the company buys £180,000 of equipment in the period between January and 31 March 2021 it is still only entitled to the AIA on £50,000. The balance would qualify at the normal Capital Allowance rates of 6% or 18% per year on a reducing balance. It is going to take a minimum of twelve years to obtain even 90% of the tax relief.
To avoid the trap and obtain the AIA for all its expenditure Company A should incur at least £130,000 (£180,000 – £50,000) of it on or before 31 December 2020.
Once you are committed to buy the equipment then the capital expenditure is treated as incurred. That’s usually the date you sign a purchase order or equivalent document. It is not the delivery date, as long as that is not too far in the future.
After 1 January 2021 the maximum AIA is a fraction of the normal annual amount. If your financial year ends on 31 March 2021 it’s just £50,000 (£200,000 x 3/12). If you’re considering capital expenditure in excess of the restricted AIA, spend it on or before 31 December 2020.
For more information speak to Liam McCreath, Tax Manager in our Glasgow office.
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