Accelerate your cashflow

The Annual Investment allowance (AIA) provides tax relief to businesses that need to purchase plant & machinery (P&M) (excluding cars). The AIA allows you to deduct the total amount spent on qualifying P&M from your taxable profits in the same tax year, accelerating the tax relief otherwise provided through writing down allowances at 18% or 6% per annum. The result is an immediate acceleration of the tax saving to the current year which could be critical for a cash strapped business.

The government increased the value of the AIA from £200,000 to £1m per annum from 1st January 2019 for a 2 year period only as a measure to boost spending. Last week it was announced that this £1m increase will be available until 31 December 2021.

This is great news for businesses who are planning to invest in capital assets in 2021.

We expect that the AIA will be reverting to £200,000 at the end of 2021 so you should plan the timing of your spending wisely over the next 24 months to ensure that you maximise the use of your available AIA – for example bringing forward any planned expenditure from January 2022 to take advantage of the higher pre January 2022 AIA under the transitional rules.

As an example, if ABC Ltd was looking to invest £500,000 in plant and machinery (P&M) in their financial year to March 2022, the date of acquisition would have a substantial impact on the tax cashflows to this company.  For the purpose of this example we will assume this is all P&M which would qualify for the main pool and does not include cars.

Under the transition rules, ABC Ltd would be entitled to an AIA to March 2022 of £800,000 which will be restricted to £50,000 for expenditure between January and March 2022.

If ABC Ltd acquired the P&M on 31 December 2021, it would all be eligible for the AIA, reducing the trading profits of ABC Ltd by the full £500,000 and saving tax of £95,000 in the year to 31 March 2022.  Alternatively, if ABC Ltd acquired the P&M on 1 January 2022, only £50,000 would be eligible for the AIA and the balance of £450,000 would be added to the main pool to be written off at 18% per annum.  In the year to 31 March 2022 the tax saving would be reduced to only £24,890.  It will take many years for ABC Ltd to receive the benefit of the balance of tax savings of £70,110 as the writing down allowances are applied.

As you can see careful timing for purchasing decisions and contracts will be key to ensure that you make the most of the available AIA.

If you are unsure of your limits or are considering a significant purchase and require advice to ensure you maximise your allowance claims please do not hesitate to get in touch with the business tax team at Garbutt & Elliott LLP. Alternatively, please email Karen Sadler on ksadler@garbutt-elliott.co.uk.