Make use of £1m annual investment allowance

by Rob Stokes

Published on 14th October 2020

STOP PRESS: the government has announced that the Annual Investment Allowance will temporarily remain at £1m for another year, until end of December 2021…..

If you are thinking of investing in capital for your business – that is, plant and machinery – then now is a good time, because after 31 December, the annual investment allowance is due to drop right down.

Currently, and until 31 December, the annual investment allowance (AIA) is £1million, the level it was temporarily increased to on 1 January 2019. However, on 1 January 2021, it will revert to £200,000.

So if yours is a business which invests heavily in plant and machinery, or plans to soon, then it makes sense to do so before the end of the year – as long as it’s affordable for your business.

What is the annual investment allowance

The AIA refers to tax allowances on capital items, particularly plant and machinery you use for your business. You can deduct the cost of these items from your profits before tax, currently to a maximum of £1m but from 1 January 2021 to a maximum of £200,000.

Capital items which qualify for AIA include:

  • items that you keep to use in your business
  • costs of demolishing plant and machinery
  • parts of a building considered integral, known as ‘integral features’ (such as a lift)
  • some fixtures, for example fitted kitchens or bathroom suites
  • alterations to a building to install other plant and machinery – this does not include repairs.

Not included are items you lease under an operating lease and anything given to you for the business.

When you can claim AIA

You can only claim AIA in the accounting period in which you bought the item and the date you bought it is:

  • when you signed the contract, if payment is due within less than 4 months
  • when payment’s due, if it’s due more than 4 months later

Claims for AIA are made via your tax return.

Special rules apply if, as may well be the case now, the amount you can claim changes during your accounting period.

If this happens, then you need to work out how much AIA you have BEFORE the change, and how much AIA you have AFTER the change. You base this on the percentage of your accounting year that had elapsed on the date of the change (in this case, 1 January 2021) and the percentage remaining after that date.

For example, if you will be nine months (or three quarters) into your accounting year on January 1 2021, then three quarters of the AIA, at a rate of £1m applies to those nine months. This equals £800,000.

At the start of 2021, you then have three more months (a quarter) of your accounting year to run, and so your AIA is a quarter of £200,000, namely £50,000.

The AIA has changed several times of the last decade – back in 2012 it was a mere £25,000 – so it does make sense to take advantage of this unusually high £1m level, if it is affordable for your business.

For help with annual investment allowance, or any other tax advice relating to your business, whether you run a limited company, or are a sole trader or in a partnership, please get in touch with the tax team at Optimum.

At Optimum, we help business owners in Swindon, Wiltshire, Gloucestershire and throughout the South West.

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