Investment tax allowance extended for a year

12th November 2020

In a move to help stimulate investment in UK manufacturing, the government is extending until 1 January 2022 the £1m Annual Investment Allowance (AIA).

It was due to return to its normal limit of £200,000 on 1 January 2021.

This means businesses can continue to claim up to £1m in same-year tax relief through the AIA for capital investments in plant and machinery until 1 January 2022.

The move is intended to boost confidence as companies look to manage the impact of the Covid pandemic and Brexit, and plan for the future.

The October 2018 Budget temporarily increased the AIA from £200,000 to £1m for two years starting on 1 January 2019 to provide businesses with significantly faster tax relief for plant and machinery investments.

The AIA may only be claimed in the accounting period in which the expenditure is incurred; it cannot be deferred to a later period.

Businesses can claim the AIA for expenditure on plant and machinery, with the key exception of expenditure on cars.

It is a 100% upfront allowance that applies to qualifying expenditure up to the annual cap.

Where businesses spend more than that annual limit, any additional qualifying expenditure will attract less generous writing-down allowances at 6% or 18%.

If a business has an accounting period of more or less than twelve months, the maximum AIA is proportionally increased or reduced.

When is the expenditure incurred?

The date when the expenditure is incurred is important when AIA limits may be exceeded. Generally, expenditure is incurred when there is an unconditional obligation to pay. This applies even where some of the expenditure is not required to be paid until a later date.

The rule is modified to a 'cash paid' basis where part of the expenditure is not required to be paid until more than four months after the normal unconditional obligation to pay, or if the obligation to pay is advanced before normal commercial practice in order to benefit from allowances in an earlier period.

Hire purchase

For hire purchase or similar contracts, plant and machinery is treated as owned by the person who has the benefit of the contract, and the hirer is treated as having incurred all the expenditure under the contract when the asset is brought into use in the trade.

So from the hirer's point of view, AIA is due on all capital payments when the contract is signed and the asset is bought into use in the trade. If the asset is not in use at the year end, then capital allowances are only due on the capital element of the payments made under the contract.

HMRC can request evidence of this for substantial hire purchase acquisitions shortly before the balance sheet date.

Please contact your Bishop Fleming advisor to discuss any planned capital expenditure.

Check out our Business after COVID-19: Transition Knowledge Hub for more guidance and advice on managing the pandemic.

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