Annual Investment Allowance £1 Million Temporary Cap Extended Until 1 January 2022
In November the government announced it is extending the cap relating to the Annual Investment Allowance. Here we take a look.
AIA, RDAs and more
On the 12th November 2020, the UK government announced that the expiry date for the £1 million Annual Investment Allowance (AIA) will be extended by a further year to the 1st January 2022. It is hoped this will help to stimulate investment in UK manufacturing and shore up up business confidence.
What is the Annual Investment Allowance?
The Annual Investment Allowance (AIA) was first introduced in the 2008 Finance Act. It allows businesses to take off the cost of particular assets from their taxable profits. With the threshold set at £1 million, in theory companies can deduct this amount. This clearly would save a substantial amount of money, providing they have invested the money in eligible expenditure.
AIA can be claimed on most assets that businesses typically buy, for example machinery and tools. It also applies to hire purchased items, although not if the assets are lease-based.
Alongside plant and machinery, eligible expenditure includes building parts and fixtures, some vehicles (although not if they’re for private use), lifts, air conditioning, heating and lighting systems and specialist equipment.
Note that the company must have actually bought the items - they cannot have been gifted or rented. Additionally, if any assets are later sold having benefited from AIA, then the company may be liable to pay tax subsequently.
Example of the annual investment allowance:
James is a sole trader and isn’t registered for VAT. He purchases a new computer to use for his business which costs £1,200. His business’s profits for that year total £20,000. He can receive annual investment allowance in respect of the computer cost, so he will pay class 4 NI and tax on £18,800 (£20,000-£1,200 = £18,800).
Businesses that qualify for the Annual Investment Allowance
The AIA is available to most UK businesses including:
- Sole Traders
It doesn’t matter what industry the business is in, as long as it’s currently trading and has purchased a qualifying asset in the relevant period. However, trusts and mixed partnerships (those containing individuals and companies) are specifically excluded.
The Annual Investment Allowance applies equally to:
- Production and assembly businesses, manufacturers and workshops
- Doctors, dentists, healthcare professionals and private hospitals
- Agricultural businesses, growers, farmers and food/drink producers
- Pharmaceutical businesses, research establishments and laboratories
- Transport and distribution companies, couriers and hauliers
- Leisure businesses, pubs, hotels and retailers
AIA and RDAs
If a company has already used up its AIA allowance, an additional scheme for companies undertaking eligible R&D work could offer further relief. It’s called Research and Development Capital Allowances (RDAs)
RDAs mean that companies can write off 100% of costs against tax regarding purchases on facility build costs and capital equipment for eligible R&D projects. If an organisation is not able to claim Annual Allowance, it provides a timing advantage over routinely claiming capital allowances at 18% or 8%. Additionally, allowances for build costs relating to an R&D facility - which typically fall outside the scope of the AIA - will be eligible for RDAs.
Throughout our time working in R&D tax relief and funding, we’ve also seen many cases where ‘revenue expenditure’ has been capitalised to the balance sheet as an Intangible Fixed Asset (IFA). It is commonly (wrongly) believed that, since these items look like “capital”, the R&D enhancement will no longer apply. However, this is not correct, making it important to consult us and ensure any benefits available to your client’s company are fully maximised.
Understanding the guidance around AIA
Making the most of the AIA limit is well worthwhile. Businesses looking to make large future capital expenditure purchases may there wish to accelerate projects by each December. This means they can take full advantage of the current AIA limit.
There are many benefits of using the AIA but businesses need to be clear about the legislation surrounding it. The amount of AIA claimable must be apportioned correctly and an adjustment must be made if your client’s accounting period is more or less than 12 months.
Again, if you would like to get further advice about any aspect AIA in relation to R&D, speak to our experts.
R&D development costs classed as IFA’s may still be included in a claim for R&D Tax Credits by following these steps.
Firstly, if IFA’s are not discounted from profits for tax purposes, the value of any extra in the year must be amortised fully in the tax computation. The expenditure can then attract enhanced R&D relief.
The thinking here is that although the costs have been capitalised in the financial statements, this has been unwound in the tax computation and CT600. Furthermore, as it was a deliberate decision to capitalise, the costs can to be written off to the Profit and Loss. Furthermore, amortisation may be claimed to a 100% value in the tax computation.
Secondly, the capitalised expenditure must be clearly outlined to HMRC in the R&D report. As the capitalisation of costs usually relate to longer term R&D objectives, it doesn’t seem appropriate to offset them against current profits. Furthermore, capitalisation serves to increase trading profit and strengthen the balance sheet. This can be desirable if any financial covenants are in place, or if the financial performance of a company is to be scrutinised.
The Annual Investment Allowance and Asset Finance
Companies looking to acquire an asset usually use third-party finance such as loans or leases.
When it comes to the Annual Investment Allowance, using the right type of finance is very important:
- Purchases: Lease purchase and hire purchase do qualify
- Leases: Operating leases, finance leases, rental agreements and fixed or minimum term leases don’t qualify
To be eligible for the Annual Investment Allowance, such agreements will need to have intent to ownership. This means it’s important that business owners are clear, especially as the term “lease” is fairly generic with both agreement types.
This is a highly complex and ever-evolving area of tax. Therefore, it’s strongly recommended accountancy firms partner with R&D funding specialists such as Myriad Associates for the most professional, up-to-date advice.
Find out more about working alongside our team to offer your clients a more complete, comprehensive R&D tax service.
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