Companies are being urged to act quickly to ensure they take full advantage of tax relief for the purchase of plant and equipment.
Currently the full cost of such purchases can be off set against tax through the Annual Investment Allowance (AIA), up to a maximum of £1 million, following a temporary increase introduced by the Government.
From January 1st, 2021, the AIA limit will reduce to £200,000 but for some businesses, the limit could be even lower – costing some firms hundreds of thousands of pounds in reduced tax relief. Now Paul Jennings, Managing Director of JCB Finance, is urging customers to take full advantage of their AIA before it’s too late.
He said: “While the AIA is due to revert to £200,000 on 1st January 2021, businesses whose year-end is not 31st December could see their AIA allowance drop even lower, in some cases to as little as £50,000 if they don’t time their purchases right. “The temporary increase to £1 million is only available for qualifying expenditure incurred in 2019 and 2020. If companies have a 31st December year end, then the position is straightforward, as a December 2020 year end will coincide exactly with the decrease in the limit. Put simply, firms would receive £1 million potential relief in 2020 and £200,000 potential relief in 2021.
“For companies with a year-end other than 31st December, things become much more complicated. Due to how the available AIA relief is calculated, for businesses whose financial year spans the calendar year, their effective AIA limit restricted to significantly less than £200,000. That’s why it is important that companies act now to take full advantage of their AIA.
A business with a 31st March year end will have a chargeable period which runs from 1st April 2020 to 31st March 2021. The overall AIA available to them for this period will be £800,000, being the total of the following two amounts:
- From 1st April 2020 to 31st December 2020 = £750,000 (nine months’ worth of the £1m limit)
- From 1st January 2021 to 31st March 2021 = £50,000 (three months’ worth of the lower £200,000 limit)
However, whether or not the full £800,000 limit is available will depend on when the company incurs its qualifying expenditure within the year to 31st March 2021.
The transitional rules mean the maximum AIA for expenditure incurred in the three-month period from 1 January 2021 will be restricted to £50,000 (calculated as above), without taking into account the level of expenditure in the nine months to 31 December 2020.
Purchases made in the nine months 1st April 2020 to 31st December can benefit from up to the maximum potential relief of £800,000. However, the restricted £50,000 level of AIA available for purchases made in the remaining three months from 1st January 2021 applies. This means that, in a worst-case scenario, for a business with a 31st March year end, if the business didn’t buy any qualifying assets in the run up to 31st December 2020 their AIA for the year ending 31st March 2021 will only be £50,000.
For a business with a January year end, the potential AIA relief for items purchased in January 2021 would be just £16,667.For a business with a June year end, the potential AIA relief for any items purchased in the period 1st January to 30th June 2021 will only be £100,000.
The Annual Investment Allowance (AIA) is a type of capital tax allowance that offers 100% tax relief on qualifying capital expenditure in the year of purchase. Expenditure on business assets (e.g. plant and commercial vehicles) per year is 100% allowable against taxable profits of a business, deductible in the year that you buy them. This accelerates the tax relief rather than the tiered writing down allowances (WDA) normally applied over several years. In the Autumn 2018 Budget the Government announced a temporary increase in the AIA to £1 Million per year from 1st January 2019, reverting to its former £200,000 per year from 1st January 2021.