The Chancellor’s 2018 Autumn Budget included an announcement that the Annual Investment Allowance (AIA) would increase to £1,000,000 for a two year period from 1 January 2019 to 31 December 2020. With the previous AIA limit standing at £200,000, this substantial increase provides businesses with a huge incentive to invest in plant and machinery and receive immediate tax relief on the investment into qualifying expenditure. Capital expenditure qualifying for Capital Allowances but exceeding the AIA limit will rank for Capital Allowances at the standard (likely 18%) rate.
For businesses with a 31 December year end, the relief is straightforward however for year ends which span 1 January 2019, transitional rules will apply. Where a business has an accounting period that spans 1 January 2019, when considering how much AIA the business can benefit from, the AIA entitlement before and after 1 January is considered as follows:
a) Based on the £200,000 allowance pre 1 January 2019, apportioned for the number of months making up the accounting period falling before 1 January 2019.
b) Based on the £1,000,000 allowance post 1 January 2019, apportioned for the number of months making up the accounting period falling after 1 January 2019.
(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 2019 year end would have the following AIA entitlement:
a) £200,000 x 9 months = £150,000 (1 April 2018 – 31 December 2018)
b) £1,000,000 x 3 months = £250,000 (1 January 2019 – 31 March 2019)
(a) + (b) = Maximum potential AIA = £400,000
But the actual AIA claim is then also determined by the date on which the expenditure occurs during the accounting period that is subject to the transitional rules. The transitional rules state that expenditure incurred prior to 1 January 2019 is limited to the maximum AIA available at that time i.e. £200,000.
In the example above, only £200,000 of AIA would be available to claim on expenditure between 1 April 2018 and 31 December 2018. To maximise the full potential AIA claim of £400,000, a further investment of £200,000 would be needed between 1 January and 31 March 2019.
Similar complex rules apply when the AIA drops back to £200,000 on 1 January 2021 with, for example, only £50,000 of AIA available in the three months ending 31 March 2021. Purchasing decisions and contracts will need to be finalised early so there could be a rush of orders for scarce kit in late 2020.
For those contemplating investing in new grain handling facilities, a recent tax case has helped to clarify the tax relief available on grain silos. We will cover this in more detail next time but would be pleased to hear from you sooner if this applies to your business.
Additionally, relief under the new Structures and Buildings Allowance will also be given on a 2% straight-line basis for non-residential structures and building works where contracts were entered into after 29 October 2018.
For those farming in a non-company structure, additional complexity is that tax relief for losses against total income is capped at 25% of total income. This means you may not be able to benefit in the year from all the investment made, as the remainder will be carried forward. Claims for losses against Capital Gains are not subject to this cap, although the rate of relief may be lower (Capital Gains Tax is charged at 28% or 20% compared to Income Tax rates of perhaps 40% or even 45%).
Do you want more information or advice on your Annual Investment Allowance?
The timing of expenditure is crucial to get the most benefit from the AIA. If you are unsure of your limits or would like advice on when best to invest to utilise your AIA fully, please get in touch with Kerry O’Reilley on email@example.com or 01295 250401.