After a temporary increase to £1,000,000 in January 2019, the Annual Investment Allowance (AIA) will decrease back to £200,000 from 1 January 2021. The timing of the change means that for businesses which do not have a 31 December year end, a hybrid level of AIA will be initially available.
Below is a note of the AIA available based on the year end of the business in 2021:
It is important to note that the timing of asset purchases can significantly impact allowances available. Under the transitional rules, allowances available on capital expenditure are determined by the date at which they are purchased. This is illustrated above where the total AIA available is proportionally split into the periods before and after the decrease takes effect.
To demonstrate the impact of this in an example, take a business with an accounting year end of 31/03/2021 which purchases an asset costing £500,000 in the year. The difference in allowances available if the asset is bought in November 2020 rather than February 2021 are as follows:
This shows an additional £70,100 in corporation tax savings can be made by purchasing the asset in the period with a higher proportional level of AIA available. By purchasing in November the total AIA available for the 9 month period is £750,000 and therefore covers the full cost of the asset. Delaying until February means it falls into a period with only £50,000 of AIA available and as a result the remaining £450,000 only attracts allowances at 18% as opposed to 100% with AIA.
The significant size of the decrease means that, more than ever, it is important to consider the timing of any purchase of assets to ensure that maximum tax relief can be obtained. We would recommend that you consult with your Drummond Laurie point of contact before you make any key decisions in relation to fixed asset purchases.
For further advice on AIA, or any aspects of capital allowances, please contact us via e-mail on email@example.com or phone 01324 441250.