Temporary increase in the Annual Investment Allowance (AIA), beware the transitional rules, and get the timing right to maximise the AIA available.
With the temporary increase in the Annual Investment Allowance (AIA) from £200,000 to £1,000,000 from 1 January 2019, transitional rules apply for accounting periods spanning 31 December 2018. A business with such a year end will be entitled to a maximum AIA calculated by reference to the length of the accounting period falling before and after 31 December 2018 and the limits referred to above.
However, there is a cap of £200,000 on expenditure in the period before 31 December 2018, prior to the increase that applies from 1 January 2019.
As we have now entered 2019, it is too late to do any planning in respect of this cap of £200,000 on qualifying capital expenditure prior to 31 December 2018 by deferring expenditure until 2019.
However, there is time to look at expenditure in 2019 in relation to the business year end in order to maximise the AIA available.
For example, if a business has a 31 March year end, the total AIA available is £400,000. This is 9/12 of £200,000 + 3/12 of £1,000,000 = £400,000,
If a business is contemplating expenditure now and, when taking previous expenditure in the current financial year into account, it is likely to exceed £400,000, then consideration should be given to limiting expenditure to £400,000, and deferring the balance until on or after 1 April 2019, when AIA of £1,000,000 will be available for the year ending 31 March 2020, albeit the tax relief will be given later.
Also, now is the time to be aware of and plan for a potentially nasty surprise when the temporary increase comes to an end on 31 December 2020, and the transitional rules for accounting periods spanning this date will apply.
Here, harsher rules apply, imposing a cap on expenditure incurred in the period after 1 January 2021, at which point the AIA is reduced to its permanent level of £200,000.
This point is best illustrated by way of an example, using a business with a 31 March year end.
For the year ending 31 March 2021, the AIA limit for this period will be £800,000.
This is 9/12 of £1,000,000 = £750,000 (pre 31/12/2020) and 3/12 of £200,000 = £50,000 (post 31/12/2020), £800,000 in total.
However, for the 3 month period 1 January 2021 to 31 March 2021, the limit is £50,000 (3/12 x £200,000).
So, even though the AIA has reduced from £1,000,000 to £200,000, a business would only be entitled to AIA of £50,000 on expenditure in the 3 month period from 1 January 2021 to 31 March 2021. Therefore, a great deal of thought and planning is needed.
31 December year ends are not affected by the transitional rules, but these businesses need to ensure that they make full use of the £1,000,000 available in the year ending 31 December 2020, before it reverts to £200,000 on 1 January 2021.
In summary, apart from a business with a year ending 31 December 2021, and despite the fact that the AIA reverts to £200,000 on 1 January 2021, a business will not receive the maximum AIA of £200,000 for qualifying expenditure incurred in 2021.
If you think your business may be affected by these transitional rules and would like further advice, please do not hesitate to get in touch with your nearest Thomas Westcott office.