The Annual Investment Allowance (AIA) is a Capital Allowance that enables a business to write off the cost of most items of plant and machinery in full, against profits in the year in which the expenditure is incurred.
The Annual Investment Allowance can be claimed against most purchases of plant and machinery relating to a commercial property, including the building itself - (generally worked out as a percentage of the purchase price), plant and machinery installed when improving your property (e.g. electrics, fire alarms, air conditioning, sanitaryware, etc.), as well as items that are associated with the core operations of your business. For example, Hotel & Furnished Holiday Let owners investing money on decorative items to make their property more appealing.
The main exclusion is cars. However, 100% first year allowances are available for new and unused cars with CO2 emissions of 75g/km or less.
For 12-month periods beginning on or after 1 January 2019, the AIA was set at a temporary limit of £1,000,000. The allowance is set to be adjusted again on or after 1 January 2021, where it is due to go back to its previous £200,000.
Once the allowance has been fully used up, any further capital expenditure on plant and machinery will attract writing down allowances only (unless it is of a type that qualifies for a first-year allowance).
To calculate the AIA that could be available, we first need to consider your year-end. Here are two examples. The first example is for a year-end of December 31st 2020, and the second is for a year-end of 31st March 2021.
12 months pre 31st December 2020: Full AIA
9 Months pre 31st December 2020: £1,000,000 x 9/12 £750,000.00
3 Months post 31st December 2021: £200,000 x 3/12. £50,000.00
So, for companies with a year ending 31st March 2021, the AIA limit for this period will be £800,000.
Even though the AIA has reduced from £1,000,000 to £200,000, a business would only be entitled to AIA of £50,000 on expenditure in the 3-month period from 1st January 2021 to 31st March 2021.
Businesses with a year-end of 31st December are not affected by these transitional rules.
In summary, even though the AIA reverts to £200,000 on 1 January 2021, a business that doesn’t have a 31st December year-end, may not receive the maximum AIA of £200,000 for qualifying expenditure incurred in 2021. It is important to bear this in mind when making capital expenditure. With forward planning any adverse effect can be minimised, for example, move your year-end, or delay/bring forward expenditure, etc.
Correctly timing your capital expenditure could potentially save you many thousands on your tax bill.
It takes less than 5 minutes to discover what Capital Allowances you could be entitled to claim against your capital expenditure, do not miss out!
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