Capital Allowances – Major Change to the Annual Investment Allowance (AIA)

18th August 2020

It is the current intention that the AIA for businesses will decrease from £1,000,000 to £200,000 from 1 January 2021 onwards.

By way of a recap, the AIA allows a business to obtain 100% tax relief on qualifying capital expenditure incurred in an accounting period. Any capital expenditure in excess of this total will usually qualify for writing down allowances instead, where tax relief is available at 18% or 6%.

For businesses with a 31 December 2020 year end, the change will be straightforward. However, if large amounts of capital expenditure are planned, it may be advisable to incur this prior to the change in the AIA in order to maximise tax relief.

Accounting Periods Straddling 31 December 2020

In these instances great care really needs to be taken regarding the timing of any capital expenditure, as it is very easy to get caught out by these changes and miss out on significant tax relief.

The total available AIA for the whole accounting period is not always available at any one point in the accounting period. This is where the rules get confusing and where many businesses could lose out on significant tax relief.

For example, per the attached table a business with a 31-1-2021 year end has AIA of £933,333 available. This total is made up of 11/12 of £1m and 1/12 of £200,000. However, this relief is only available to a business if they time their expenditure during the accounting period correctly. If the expenditure is all incurred in the 2020 months of the accounting period £933,333 of AIA is available.

However, if the business decides to incur the capital expenditure at the end of the accounting period in January 2021, then only £16,667 of AIA is available. This means that the business has lost out on £916,666 of AIA, where tax relief is at 100%! Instead the business may only claim WDA, where the rate of tax relief is at 18%or 6%.

This useful breakdown shows the available AIA based on when accounting periods end in different months in 2021.

Post 2021 the available AIA for a business will be £200,000 for a 12 month period. This is irrespective of when the year-end will fall.

How We Can Help

We know that many businesses wait until towards their financial year end before committing to capital expenditure and indeed for some seasonal businesses, capital expenditure is restricted to when operationally changes can be made, however with these changes, it is absolutely crucial to plan ahead to avoid an unfavourable consequence.

If you are planning on incurring significant capital expenditure in the near future, you may find it useful to get in touch.

This is so we can advise you on the best time to incur this expenditure and ensure your business does not miss out on the potential tax relief available.

Related Contacts

Geoff Fraser

Geoff Fraser Head of Taxation Services

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