Businesses that are investing more than £200,000 in plant machinery may benefit from a change to the capital allowance rules, which occurred in January 2019. This should allow them to obtain tax relief at a much earlier time.

Business profits (after any tax adjustments) are reduced by capital allowances to arrive at taxable profits.

Since capital allowances are thought of as a trading expense of an accounting period, they can sometimes increase a loss or turn profit into a loss for tax purposes.

This will then have an impact on the amount of tax payable by a business – so where a business has the potential to spend beyond the qualifying amount, it may be beneficial to do so for tax purposes.

What is the annual investment allowance?

The annual investment allowance (AIA) for capital allowances purposes is a full allowance for qualifying expenditure on machinery and plant. As such, a business that is buying a piece of equipment that qualifies for the AIA can deduct 100% of the cost of that asset from business profits, to reduce the amount of profit and ultimately reduce the amount of tax due.

  • VAT registered businesses claim AIA on the total cost of the asset less any VAT that can be reclaimed on that asset
  • Non-VAT registered businesses can claim the AIA on the total cost of the asset
  • Connected companies are only entitled to one AIA between them

The AIA has been set at £200,000 since 2016. However, in the 2018 Autumn Budget, the limit was announced to be rising to £1,000,000 from January 2019 for a limited amount of time. The AIA will revert to the original amount from 1 January 2021.

This means businesses planning to make significant investments in qualifying machinery or plant may decide to bring purchases forward to benefit from AIA.

If a business spends more than the annual AIA limit, additional qualifying expenditure will still attract relief from regular capital allowance rules. However, this will be spread over several years, rather than in one go.

What are the transitional rules?

It is worthwhile to seek guidance when expenditure on AIA items is being considered and the business has a chargeable period that spans either of:

  • The operative date of the increase to £1,000,000 on 1 January 2019, or
  • The operative date of the reversion to £200,000 on 1 January 2021.

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