The government wants all businesses to increase their capital expenditure and is temporarily raising the Annual Investment Allowance (AIA) from £200,000 to £1,000,000 between 1 January 2019 and 31 December 2020.
This means that most businesses will be able to deduct up to £2,000,000 of capital expenditure on plant and machinery (P&M) in the periods involved instead of having relief spread over many years; this will generate a significant timing advantage in tax cash flows to the detriment of equivalent investments after 2020.
Taxpaying businesses that invest in commercial property are likely to be the biggest beneficiaries of the AIA increase because the majority of these types of claims are heavily weighted towards P&M that qualifies for the lowest rates of relief (e.g. ‘integral features’ in the special rate pool).
Reduction in rates for ‘integral feature’ and related assets
Hidden in the detail of the autumn budget is a reduction in the writing down allowance (WDAs) for existing (and new) plant and machinery in the special rate pool (SRP) from 8% to 6%. This change will come into effect from 1 or 6 April 2019 (corporation and income tax dependant).
Instead of getting just over 50% of your expenditure deducted by year 9, you will now have to wait another 3 years (ie. year 12) to receive a comparable amount. It is this deferral of tax relief that funds the introduction of the new Structures and Buildings Allowance (SBA) and will affect anyone that makes significant investments beyond the AIA limits.
SRP assets include things like solar panels, long life assets and ‘integral features’ such as lifts, escalators, moving walkways, space/water heating systems, air-conditioning, air cooling systems, hot/cold water systems, solar shading and power/lighting systems. Integral features are commonly found in commercial properties and will typically account for over 80% of any plant and machinery allowances claim.
Plan early to make the most of your AIA
Instead of getting tax relief of up to £11,400 or £27,000 (corporation or income tax) in Year 1, eligible businesses will be able to write-off up to £1,000,000 in the year the expenditure is incurred instead of it being spread over time (i.e. an immediate equivalent tax saving of between £190,000 and £450,000).
Businesses with an accounting period that straddle 1 January 2019 or 31 December 2020 (e.g. March year-ends) will need to adjust any claims for AIA to reflect the transitional rules and specifically expenditure caps in the periods involved.
You can only claim AIA in the period you bought the item and it is worth remembering that this may differ from accounting treatment. It is also worth remembering that if you buy something under a hire purchase contract you can claim the full amount (i.e. on the payments excluding interest that have still to be made). Further details on payment recognition and planning can be found here.
Most businesses should be eligible (notable exceptions include mixed partnerships). It should also be noted that the AIA does not apply to all asset categories. For example, cars and assets acquired under long funding leases are excluded. To maintain the integrity of the AIA, there are also restrictions on the total amount that could be claimed by groups and other associated parties.
If you have a construction project that is due to overlap either accounting or AIA transition rules and want to make the most of the accelerated tax relief, please do not hesitate to get in touch.