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AIA of £1million extended for a further year

In a positive move, the Government has announced that the current Annual Investment Allowance (AIA) of £1,000,000, which was due to revert down to £200,000 on 1 January 2021, will be extended for a further year to 1 January 2022.

The change, in response to the effects Covid-19, means that businesses will continue to benefit from 100% upfront tax relief on the first £1,000,000 of Capital Allowances identified, encouraging investment on property purchases, developments and refurbishments over the next 12 months.

What is the Annual Investment Allowance?

The Annual Investment Allowance (AIA) is a key tax planning tool. It allows a 100% allowance for qualifying plant and machinery expenditure incurred in an accounting period up to a specified annual amount each year.

How much is the Annual Investment Allowance?

AIA was capped at £200,000 per year up to 31 December 2018 with the limit being temporarily increased to £1 million per year for each of the following two years, due to end on 31 December 2020. This has now been extended to 31 December 2021. As of 1 January 2022, the AIA limit will revert back to £200,000. There are transitional rules in place to deal with the reduction in AIA, however, these rules can mean that allowances could be lost where a business has an accounting period that straddles 31 December 2021. The timing of expenditure is therefore important.

For a business with a 31 December 2021 year-end, the relief is straightforward. However, for year ends which span 1 January 2022, transitional rules will apply and the AIA entitlement before and after 1 January is considered as follows:

A) Based on the £1,000,000 allowance pre 1 January 2022, apportioned for the number of months making up the accounting period falling before 1 January 2022.
B) Based on the £200,000 allowance post 1 January 2022, apportioned for the number of months making up the accounting period falling after 1 January 2022.
A + B are then added together to calculate the maximum potential AIA for the accounting period subject to the transitional rules.

For example, a business with a 31 March 2022 year-end would have the following AIA entitlement:

A) £1,000,000 x 9 months = £750,000 (1 April 2021 – 31 December 2021)
B) £200,000 x 3 months = £50,000 (1 January 2022 – 31 March 2022)
A + B = Maximum potential AIA = £800,000

In addition to the above, the actual AIA claim is also determined by the date on which the expenditure is incurred. There is a further cap when the limit reduces, that restricts the AIA limit to the proportion of the AIA in that part of the accounting period.

In the above example, if the business purchased an item of machinery costing £400,000 on 30 September 2021, and then another costing £400,000 on 28 February 2022, it could appear that the total allowable expenditure of £800,000 would qualify for AIA at 100%.

However, as the second item of machinery was purchased in the period after 31 December 2021, the claim for that period is restricted to the AIA limit applying to 1 January 2022 – 31 March 2022 i.e. £50,000.

Therefore the AIA claim for the period is £450,000, (£400,000 for the first machine and £50,000 for the second). The remaining £350,000 of expenditure will qualify for Capital Allowances at the standard rate (18%).
If both pieces of machinery had been purchased before 31 December 2021, the maximum AIA of £800,000 could have been claimed.

The timing of expenditure is therefore crucial, with purchasing and contract decisions being made as soon as possible in order to get the most benefit from the AIA. An additional complication arises when assets are brought on hire purchase or when payment is otherwise deferred by four months or more. In these circumstances, AIA cannot be claimed on deferred payments until the asset is brought into use. This rule is typically relevant for out of season purchases of combines, balers etc.

We can help you buy farming machinery in a tax-efficient way

Please ask us before you commit to a particularly significant purchase or finance deal. If you are unsure of your limits or would like further advice on how to best utilise your AIA fully, please get in touch with your usual Ellacotts contact or contact Sara Burgess on sburgess@ellacotts.co.uk or 01536 646000.

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