For capital items bought for business purposes – whether as a sole trader, partnership or through a limited company – there has been a generous Annual Investment Allowance (AIA) limit of £1 million since 1 January 2019. That means that the vast majority of businesses have been able to claim full tax relief for amounts spent on capital items in the year they were bought. This allowance applies to most capital equipment, including commercial vehicles but not cars.
However the AIA limit is set to reduce to £200,000 from 1 January 2022. Whereas this limit will still be sufficient for most businesses, there is a significant minority who spend more than £200k each year on new equipment.
For those businesses it’s important that they do not get caught out by the way the rules work when the AIA limit goes down. Basically, for year ends that straddle 31 December 2021 the allowance is split between the two accounting periods on a time-apportioned basis. However there is an over-riding rule that the allowance for the period that falls after 31 December is restricted to the time-apportioned amount.
An example of how that works:
A company has a year end of 31 March 2022. The allowance is calculated as follows:
(9/12 x £1,000,000) + (3/12 x £200,000) = £800,000
You might think therefore that you could spend up to £800,000 at any time during the accounting period and get full AIA.
BUT only £50,000 (3/12 x £200,000) is available for expenditure between 1 January 2022 and 31 March 2022.
If your business spends large amounts on capital and does not have a 31 December year it is well worth discussing with your accounts manager whether any expenditure should be brought forward to the current calendar year.
What about the super-deduction or special rate expenditure?
From 1 April 2021 until 31 March 2023 there are special capital allowances for certain types of capital expenditure. These have been introduced for companies only in an attempt by the government to avoid businesses delaying buying capital items until the corporation tax rate goes up to 25% and they get more tax relief.
Any capital items qualifying for the super-deduction or as special rate expenditure do not count as part of the AIA expenditure as the new allowances are so called ‘First Year Allowances’ (FYA).
There are restrictions on the types of assets that qualify for these FYAs:
To qualify assets must be brand new and unused.
Special rate expenditure
Qualifying assets include heating and cold water systems, electrical systems, air conditioning, lifts, solar panels and thermal insulation to an existing commercial building.
Company clients who can claim super-deductions on capital purchases should not be worried about the reduction of the AIA. However if you buy second hand machinery or buy assets to lease to third parties for example you would need to consider bringing forward expenditure to the current calendar year.
If you are a client of Friend & Grant and have any concerns about how the changes detailed might impact you please contact your account manager or our head of tax, Jan Friend.
The content in this blog is correct as at 1 October 2021 See terms and conditions.