Maximise your capital allowances

Changes were announced to capital allowances in the Autumn Budget. These include an increase in the Annual Investment Allowance (AIA) available. Make sure your business does not fall foul of the transitional rules which apply.

Increased AIA from 1 January 2019

You will no doubt be aware that the maximum AIA has been set at £200,000 per annum for expenditure incurred since 1 January 2016. The AIA provides a 100% tax write off against profits for expenditure incurred on qualifying plant and machinery (except cars).

For expenditure incurred on or after 1 January 2019, the maximum AIA is increased to £1,000,000. This increase is temporary and is for a two-year period only. The AIA will then revert back to £200,000 for expenditure incurred on or after 1 January 2021.

For those businesses with a December year end that have already used their current accounting period’s AIA of £200,000, delaying expenditure until after 31 December 2018 is a straightforward option. However, watch out for the rules that apply to businesses with accounting periods which straddle 31 December.

Pro rata - straddle calculations

Where a business has an accounting period that spans 31 December 2018, the maximum allowance for that period is potentially the sum of:

• the maximum AIA entitlement based on the £200,000 annual cap for the portion of the accounting period falling before 1 January 2019; and
• the maximum AIA entitlement based on the £1,000,000 cap for the portion of the accounting period falling on or after 1 January 2019.

So if Bloomers Limited makes up its accounts to 30 June each year, then for the year ended 30 June 2019 the maximum AIA will be:

Limits and date of spend

Unfortunately, under the straddle rules, Bloomers Limited cannot spend £600,000 at any time in the accounting period and claim AIA on the full amount. The rules state that for expenditure incurred before 1 January 2019, a limit will be introduced for the maximum figure available.

The maximum allowance will be the AIA that would have been due for the whole of the accounting period to 30 June 2019, if the increase in AIA had not taken place. This limit is £200,000 and is deemed to be the limit for the six months to 31 December 2018.

In the example, if Bloomers Limited had spent £355,000 in the first six months of the accounting period relief would be limited to £200,000. Bloomers Limited would be able to spend £400,000 (£600,000 - £200,000) in the six months to 30 June 2019 which will qualify for AIA.

However if Bloomers Limited has not incurred any expenditure in the first six months, £600,000 AIA will be available for expenditure between 1 January and 30 June 2019.

So if Bloomers Limited is considering incurring capital expenditure in excess of the available AIA, then it may be more beneficial to defer some of the expenditure until after 30 June 2019 as the full £1,000,000 AIA may be available. Bloomers Limited could spend £1,000,000 in July 2019.

AIA set to revert to £200,000 from 1 January 2021

On 1 January 2021, the AIA will revert to £200,000. This will mean that for Bloomers Limited will have an AIA in later periods as follows:

Please be aware that special rules will apply to the straddle down period

Whilst the increase in AIA is good news for businesses it is important to incur the expenditure at the right time for your business.  Please contact us for specific advice.