During a period of temporary AIA increase, it is more important than ever to time any capital expenditure in your business right.
Capital allowances can be claimed on certain items that you buy to keep for use within your business. Depending on the level of expenditure in any one period, you may be able to deduct the full cost of these purchases from your profits by using the annual investment allowance (AIA).
This article does not cover what you can and cannot claim on, but if you have any queries do get in touch with me or your nearest Thomas Westcott adviser.
From the 1st January 2019 to 31st December 2020, the AIA amount was temporarily increased to £1million, meaning we are now within 3 months of this temporary increase coming to an end and reducing back down to £200,000. There have been calls for this temporary increase to be extended but I would not plan your business activities around this as something to be relied upon.
If your business has an accounting period end that is past 31st December 2020, you will need to calculate your applicable AIA amount for your current accounting period end. For example, if your next year end is the 31st March 2021, your total AIA for that year is as follows:
£1,000,000 x 9/12 = £750,000
£ 200,000 x 3/12 = £50,000
Total AIA for 31/03/21 = £800,000
This seems quite straight forward, however, there are restrictions over the timing of these capital purchases during the year. You have a total AIA of £800,000, but if you make your capital purchases in the final three months of your accounting period, your AIA is restricted to £50,000. On the contrary, if the capital expenditure incurred falls between the 1st April and the 31st December, you have the full £800,000 available to you.
Highlighting the importance of timing, if you were to purchase a piece of equipment costing £500,000 on the 31st December 2020, this would be available for 100% tax relief, but if that purchase was made on the 1st January 2021, then only £50,000 would be available as AIA. The remaining £450,000 would go into your pool, only available for writing down allowances meaning tax relief is obtained over a much longer period of time (either 18% or 6% writing down allowances are available per annum, depending on the nature of the capital item).
In conclusion, if you are thinking about making a significant capital purchase for your business, please speak to us to ensure you get your timing right and that we can maximise the tax relief available to you. I would always advise you to discuss significant capital expenditure with your adviser prior to the event, but if in doubt, make that purchase before the 31st December 2020 so that you don’t miss out.
For more information and advice, please do not hesitate to contact me or your local Thomas Westcott office.
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