The Treasury has announced that the temporary extension of the £1 million cap for the Annual Investment Allowance (AIA), which was originally due to revert to £200,000 on 1 January 2021, will now be extended until 1 January 2022.
The Government has recognised that uncertainty arising from Covid and Brexit mean that, in many cases, businesses have been unable, or unwilling, to commit to the level of investment needed to take advantage of the £1 million allowance before 1 January 2021. It is hoped that the extension will stimulate investment by UK businesses.
The impact of the extension on tax relief for a company with a 31 March 2021 year end is as follows:
Pre-Extension (AIA of £200k post January 2021)
Overall AIA cap available to year-end of £800,000 ((£1m x 9/12= £750k + £200k x 3/12= £50k))
- AIA cap, if expenditure is incurred pre 31.12.2020 is £800,000
- AIA cap, if expenditure incurred in 3 months to 31.3.2021 was restricted to £50,000
Post Extension (AIA of £1m post January 2021)
Overall AIA cap available to year-end of £1m
- AIA cap, if expenditure incurred pre 31.12.2020 is £1 million
- AIA cap, if expenditure incurred in 3 months to 31.3. 2021 is £1million
Without the AIA extension, a business with a 31 March 2021 year end that spends £800k on qualifying plant after 1 January 2021 would only be entitled to a 100% allowance on £50,000, even though total expenditure is within the overall AIA cap of £800k. Following the change, the full £800k expenditure would qualify for the 100% allowance. Expenditure not covered by the AIA is subject to the usual writing down allowances of 18% and 6%.
Planning should be considered for accounting periods straddling 31 December 2021 with expenditure accelerated (if appropriate), to achieve maximum tax relief.
If you have any queries and would like to discuss this further, or want to ensure you maximise the extension of this relief, please do not hesitate to contact Diane Nettleton at Diane.firstname.lastname@example.org