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Since 1 January 2019, the Annual Investment Allowance (AIA) for capital allowances has been £1 million – helping businesses to invest tax efficiently.
However, from 1 January 2021, the AIA will fall back to just £200,000, reducing the amount of tax that can potentially be saved.
By using the AIA, businesses can claim against most qualifying plant and machinery expenditure allowing them to deduct the full value of the investment from their profits, thus reducing their tax bill.
That means if a business has any plans that involve significant capital expenditure, they should consider accelerating these claims in 2020 to take advantage of the higher allowance available this year.
Where a business has a 31 December year-end then they can take full advantage of the £1 million allowance this year, as only qualifying capital expenditure after the year-end will be subject to the AIA of £200,000.
However, for businesses whose year-end falls after 31 December 2020, the position is more complex as the AIA limit is determined by the amount of time within the accounting period that falls in the year 2020.
For example, if a business has a year-end on 31 March 2021, they will only be apportioned nine months of the old allowance and three months of the new allowance, which would result in them being able to claim up to £800,000 in AIA (£750,000 from 2020 and £50,000 from 2021).
Beware that the maximum AIA that can be applied to expenditure in the three-month period 1 January to 31 March 2021 is limited to £50,000 even if the business had not used the £750,000 allowance in the previous nine months.
Businesses can also take advantage of tax planning opportunities by entering into an unconditional contract on or before 31 December to purchase the qualifying expenditure, and benefit from the relief on offer this year.
Link: Claim capital allowances