In the recent budget, Phillip Hammond announced a temporary increase to the Annual Investment Allowance (AIA) from £200,000 to £1,000,000 between 1 January 2019 and 31 December 2020. The Finance Bill is still working its way through parliament and will only become binding upon receiving Royal Assent, but businesses may want to start planning for the expected change now.
The AIA allows businesses to claim 100% Capital Allowances on plant and machinery in the year of purchase, up to set annual limits. Without it, businesses would usually only be able to claim writing down allowances of either 18% or 8% (6% from April 2019) per year, meaning it would take 12 or 28 years to receive relief on 90% of the assets cost respectively. The AIA accelerates tax relief, incentivising businesses to invest in equipment and grow.
For many small businesses spending less than £200,000 a year on plant and machinery, this increase is of little benefit. However, for those looking to invest heavily in the near future, this is very much welcome news.
The concern however, is that this will be the sixth different AIA figure since its introduction in 2008, varying from as low as £25,000 up to this new high of £1,000,000. For businesses trying to plan, the yo-yo affect is causing many headaches!
Each time the AIA limits change, great care is needed as transitional rules apply. For the change coming on 1 January 2019, if your business’s chargeable period straddles this date the maximum allowance for the period will be time apportioned.
For example, a qualifying company with a year end of 30 June 2019 is expected be able to make a claim for AIA’s in respect of that year up to a maximum of £600,000 (6/12 x £200,000 + 6/12 x £1,000,000). However, the sting in the tail is that the relief will be capped to £200,000 in respect of actual expenditure incurred between 1 July 2018 and 31 December 2019 when the old rate is still in force. The available allowance between 1 January 2019 and 30 June 2019 will be the full £600,000 less any claim made in the earlier period.
Whenever there is a change in the AIA, getting the timing of expenditure wrong by perhaps just a few days could be very costly indeed. As always, taking your own professional advice is a must to ensure you obtain the relief you expect.
This article originally appeared in the December/January edition of Wiltshire Business