Reduce tax and save cash – Plan your CAPEX urgently

The Annual Investment Allowance (AIA), introduced as a temporary measure in April 2008 as a tax incentive for small businesses to invest in equipment and machinery, is set to reduce significantly from 1 January 2021.  Some simple planning may be able to stop you from getting caught out by the reduction in the relief.

The AIA allows businesses to obtain full tax relief for the cost of eligible plant and machinery (excluding cars) in the year of purchase. The value of the AIA was set at £200,000 per annum from 1 January 2016.  From 1 January 2019 this was temporarily increased, for a period of two years, to £1m per annum. 

Without any intervention from the Government the AIA will therefore revert back to £200,000 per annum from 1 January 2021.  With the Autumn Budget recently cancelled in order that the Government can focus on the Coronavirus crisis it would therefore seem likely that a reduction is imminent.

Failure to plan for the drop in the value of the AIA could result in a lost opportunity for some businesses to accelerate their tax relief on qualifying plant and machinery expenditure.  Whilst relief will still be available in later years on eligible expenditure not relieved by the AIA, this could mean more tax to pay now than is otherwise necessary at a time when cash is tight.

Example

A business with a non-December accounting year end will need to deal with a transitional period in which the timing of capital expenditure should be considered. A limited company with an accounting year ended 31 March 2021 would be entitled to the following AIA:

• For the 9 months to 31 December 2020 the AIA would be £1,000,000 x 9/12 = £750,000;
• For the 3 months to 31 March 2021 the AIA would be £200,000 x 3/12 = £50,000;
• The total AIA would be £750,000 + £50,000 = £800,000; however
  
  
• If the business had eligible expenditure of £800,000 in the year, wholly within the first 9 months, it could claim AIA of £800,000;
• If the business had eligible expenditure of £800,000 in the year, wholly within the last 3 months, its AIA claim would be capped at £50,000.
  
  
• In this example, this could mean a difference to the corporation tax payable in the period of between £117,000 and £134,000.
• It is worth noting that the company would be able to claim relief for eligible expenditure not relieved under the AIA in future years, however it will take many years to obtain the full benefit. Generally, it will be the preference of businesses to accelerate their tax relief where possible.

In order to maximise AIA businesses which have accounting periods which straddle 1 January 2021 should therefore be considering the benefits of advancing their capital expenditure to 31 December 2020 or earlier.

If you think your business may be affected by these transitional rules and would like further advice, please contact our tax director, Robert Barrie on 0141 221 2984 or email r.barrie@frenchduncan.co.uk

You may also wish to visit our capital allowances page which provides further detail of how we might help you save tax.

View Robert's profile and contact details here