It’s all about Timing – A recap on the Annual Investment Allowance Rules
We had an interesting query today. One of our clients had purchased a residential property to run as a furnished holiday letting business. They wanted us to undertake a survey and claim capital allowances but as cash flow was tight and there was no tax for them to pay in their first year of trading (as they had also furnished the property), they queried whether it was worth claiming the capital allowances now or leave it until next year.
We pointed out that you can qualify for 100% tax relief in the year of purchase on the first £1,000,000 of expenditure on most types of plant and machinery by claiming the annual investment allowance (AIA). This means that there is no immediate difference between capital and revenue expenditure. It’s as if all the eligible capital allowances was written off as revenue attracting 100% tax relief.
We also explained that the £1,000,000 limit was temporary, having previously been £200,000 a year and so it was a good year for our client to purchase and renovate a property!
They decided to go ahead with the capital allowances survey, banking the 100% tax relief in year one.
We thought it would be handy to recap on the rules of the AIA.
Annual Investment Allowance
Your business can qualify for 100% tax relief in the year of purchase on the first £1,000,000 of expenditure on most types of plant and machinery by claiming the annual investment allowance (AIA). This means that there is no immediate difference between capital and revenue expenditure.
- The £1,000,000 limit is, however, temporary, applying for the period 1 January 2019 to 31 December 2020. Previously the limit was £200,000 a year, and it will revert to this level from 1 January 2021. If your accounting period spans 1 January 2019, your maximum AIA for the period will depend on the proportions of the period falling before and after that date.
- The AIA is not available for expenditure on cars. Cars are defined as vehicles suitable for private use (including motor homes) and not built for transporting goods. Therefore, the AIA is available for expenditure on lorries, vans and trucks – and also motorcycles.
- Companies that are part of a group are entitled to only one AIA between them, but it can be divided as they wish. The same restriction applies if you have two related businesses that are run from the same premises.
Example – Working out the AIA
Charmima Ltd has drawn up accounts for the year ended 30 September 2019. For this period, the company will have a maximum AIA of £800,000, calculated as 3/12 x £200,000 (for the period 1 October to 31 December 2018) + 9/12 x £1,000,000 (for the period 1 January to 30 September 2019). However, the maximum AIA that can be claimed in respect of expenditure during the period 1 October to 31 December 2018 is £200,000, despite the overall maximum of £800,000. In the year ended 30 September 2020, Charmima Ltd’s maximum AIA will be the full £1,000,000.
The increase in the AIA is only temporary, so if you are planning an extensive programme of capital expenditure it will probably make sense to incur as much of this as possible prior to 31 December 2020.
It is also beneficial to incur expenditure just before, rather than just after, your accounting period end. You will then benefit from tax relief on the expenditure one year earlier.