Don’t get caught out by the AIA drop
The annual investment allowance (AIA) will revert to £200,000 on 1 January 2021, but businesses with a non-calendar year ends could see their own effective AIA drop even lower than they might expect.
The current £1m AIA limit is only available for qualifying expenditure incurred in the two calendar years 2019 and 2020.
If you have a 31 December year end, then the position is fairly straightforward, as your December 2020 year end will coincide exactly with the decrease in the limit. You will have an AIA limit of £1m for the year ending 31 December 2020, and a limit of £200,000 for the year ending 31 December 2021.
However, if you have any year end other than 31 December, things become much more complicated. Due to how the AIA limit is calculated for years which span the decrease on 1 January 2021, businesses could end up with their effective AIA limit restricted to significantly less than £200,000.
Working out the AIA for years spanning the drop
The detailed rules for calculating the AIA where a year spans the reduction from £1m to £200,000 on 1 January 2021 are set out in FA 2019, Sch 13. In essence, the maximum AIA for the whole 12 month period is calculated by aggregating the time-apportioned amount of each of the £1m and the £200,000 limits.
31 March year end
A business with a 31 March year end will have a chargeable period which runs from 1 April 2020 to 31 March 2021. The overall AIA available to them for this period will be £800,000, being the total of the following two amounts:
- From 1 April 2020 to 31 December 2020 = £750,000 (nine months’ worth of the £1m limit)
- From 1 January 2021 to 31 March 2021 = £50,000 (three months’ worth of the lower £200,000 limit)
However, whether or not the full £800,000 limit is available will depend on when the company incurs its qualifying expenditure within the year to 31 March 2021. That is because, under the transitional rules, the maximum AIA for expenditure incurred in the three month period from 1 January 2021 will be restricted to £50,000 (calculated as above), without taking into account the level of expenditure in the nine months to 31 December 2020.
If the business has taken advantage of the increased limit applying in the nine months up to 31 December 2020, then that might seem reasonable. The effective limit in that nine-month period is the full £800,000. However, the restricted £50,000 level of AIA available for the remaining three months from 1 January 2021 remains the same even if the business has incurred no qualifying expenditure at all in the nine months up to 31 December 2020.
This means that, in a worst case scenario, if the business didn’t buy any qualifying assets in the run up to 31 December 2020 their AIA for the year ending 31 March 2021 will only be £50,000. They are therefore worse off than if there had been no temporary increase in the AIA limit at all (when they would have received £200,000).
30 June year end
For a business with a June year end, the AIA limit for any items purchased in the period 1 January to 30 June 2021 will only be £100,000 (being six months’ worth of the £200,000 limit), regardless of what they have spent earlier in the period. For a business with a January year end, the AIA limit for items purchased in January 2021 would be just £16,667 (a single month’s worth of the £200,000) even if they had made no qualifying expenditure in the previous 11 months.
What can businesses do?
The Office of Tax Simplification noted back in 2018 that only about 30,000 businesses spend more than £200,000 a year on capital expenditure. It is mainly these bigger businesses who will have benefited from the temporary increase in the AIA to £1m. Of the remaining 1.2 million businesses who don’t spend more than £200,000 a year, some may well be caught out by the rules above, and end up with a much lower AIA than expected.
The simplest advice is for businesses to bring forward spending wherever possible to ensure they benefit from the increased AIA available up to 31 December 2020. That was what the government advised back in November 2018.
However, that may not now be possible. Covid-19 resulted in many businesses deferring purchases of plant and machinery unless absolutely essential. Many may be extremely stretched financially and/or uncertain about future trading prospects. This has led the ATT to call for the £1m AIA limit to be extended beyond 31 December 2020, to give businesses more time to recover and incentivise plant and machinery purchases at least throughout 2021.
If the Chancellor does announce such an extension at the Budget later this year, this would merely delay, rather than remove, the potential pitfall set out above, which would then come back into play when the rate eventually does drop again. It’s therefore always worth keeping an eye on the AIA limit, and bearing in mind the odd outcomes that can arise when it is changed.
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Emma a technical officer with the Association of Tax Technicians (ATT). Her background is in corporation tax and she also has a focus on VAT.
She trained with Deloitte, working in both their London and Leeds offices, and also spent a short time working in a specialist consultancy firm providing advice to other practitioners before joining...