Annual Investment Allowance (AIA) changes
AIA provides full tax relief on qualifying plant and machinery in an accounting period subject to limits set by legislation. Expenditure above these limits is written down at the normal writing down allowances of 18% or 6%. Currently the AIA limit is £1m but, assuming there are no changes in the Budget on 27 October, this is set to reduce to £200,000 from 1 January 2022.
This change can have some unexpected consequences for those purchasing plant and machinery in an accounting period which straddles the change as the allowance available is pro-rated for each period before and after 1 January 2022.
For example, based only on the transitional rules and apportioning by reference to the number of days, the maximum AIA available to the business with a 12-month tax/accounting period from 1 April 2021 to 31 March 2022 would be £802,740, which is calculated as follows:
- The period from 1 April to 31 December 2021: £1,000,000 x 275/365 days = £753,425 and
- The period from 1 January to 31 March 2022: £200,000 x 90/365 days = £49,315
Both periods are then added together to give the maximum entitlement for the period of £802,740.
However, the maximum entitlement is also affected by when the qualifying expenditure is incurred. In this example, if the total qualifying expenditure for that period amounts to £900,000 and is incurred by 31 December 2021, then the amount eligible for AIA is limited to £802,740. If it was incurred after that date, then it is limited to £49,315 subject to an overall total cap of £802,740 for the whole period. (See table below).
| Purchased between 1/4/21 and 31/12/21 (£) | AIA available (£) | Purchased between 1/1/22 and 31/3/22 (£) | AIA available (£) | Total (£) |
|---|---|---|---|---|
| 900,000 | 802,740 | 0 | 0 | 802,740 |
| 800,000 | 800,000 | 100,000 | 2,740 | 802,740 |
| 600,000 | 600,000 | 300,000 | 49,315 | 649,315 |
| 100,000 | 100,000 | 800,000 | 49,315 | 149,315 |
| 0 | 0 | 900,000 | 49,315 | 49,315 |
Professional bodies have lobbied for the legislation to be changed in order that purchases made in the year would qualify for at least the £200,000 limit regardless of when the purchases were made.
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If significant expenditure is anticipated it may be wise to purchase before 1 January 2022. There are other implications to consider, especially if purchasing under an HP agreement, so please consult with your usual tax adviser, me, or another member of our specialist Private Client Tax team.
