Time running out to use investment tax allowance

UPDATE: The 27 October 2021 Budget extended AIA to March 2023

The government previously extended the higher amount of Annual Investment Allowance (AIA) until 1 January 2022.

Businesses planning to invest in new plant and machinery need to be aware of the forthcoming reduction in the AIA from its current £1m to just £200,000 on 1 January 2022. (now March 2023)

Valuable capital allowances may therefore not be claimable if there is a delay in incurring the expenditure.

During the pandemic we have seen various forms of government support for businesses, and it cannot be entirely ruled out that an extension of the £1m AIA limit may be announced in the forthcoming Budget on 27 October 2021.  Which in fact happened

Super deduction (companies only)

It should also be noted that the government has introduced a super deduction for corporation tax purposes which may be preferable to the AIA. It offers a 130% first year deduction on qualifying capital expenditure (normally only attracting 18% writing down allowances (WDAs)) incurred between 1 April 2021 to 31 March 2023. In addition, the there is also a 50% first-year allowance for special rate (including long life) assets (normally only attracting 6% WDAs) until 31 March 2023 for companies.

A company cannot claim AIA and a super deduction on the same amount of qualifying expenditure, so in most cases it would make sense to prioritise the super-deduction where possible

See our separate article on the Super Deduction.

The rise and fall of AIA

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.

So after the additional one-year extension, the AIA reverts to £200,000 on 1 January 2022.

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.

The AIA is a 100% upfront allowance that applies to qualifying expenditure up to a specified 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. Similarly, it is time-apportioned where the period overlaps a change in the level of AIA (e.g. periods straddling 1 January 2022).

For an accounting period straddling the date of change in the AIA limit, the maximum allowance for the period is calculated on a time-apportioned basis. But there are complex rules to determine the maximum amount of expenditure in certain date ranges, which can catch out the unwary.

For accounting years ending after 31 December 2021, the maximum expenditure that can be claimed from 1 January 2022 is a pro-rata amount of £200,000 for the second part of the period. This can impact on businesses incurring capital expenditure between now and their year end.

Example (ignoring the super deduction)

Sunak Ltd has a 12 month accounting period from 1 April 2021 to 31 March 2022. Its maximum AIA entitlement would be calculated as follows:

• (a) the period 1 April 2021 to 31 December 2021, i.e. 9/12 x £1,000,000 = £750,000; and
• (b) the period 1 January 2022 to 31 March 2022, i.e. 3/12 x £200,000 = £50,000

Sunak Ltd's maximum AIA would therefore be £750,000 + £50,000 = £800,000.

However, in relation to the period 1 January 2022 to 31 March 2022, no more than £50,000 of the company’s actual expenditure would be covered by the AIA entitlement.

There are other transitional rules for businesses, so please contact your usual Bishop Fleming advisor to discuss these.

There are also transitional rules about entitlement in relation to group companies, or when businesses under common control are regarded as ‘related’.

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.

Contact us

If you are thinking about investing in your business, please feel free to contact our tax team

We will be more than happy to have a conversation with you about maximising tax reliefs available to your business.

For more information on the Manufacturing sector, please visit our Manufacturing Knowledge Hub.

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

[Gary Mackley-Smith]