This article first appeared in Farm North East

Significant changes to the Annual Investment Allowance (AIA) are anticipated to come into force in January 2022, which may influence your decision about the best time to invest in plant and machinery for your business.

The AIA allows businesses with spend qualifying for plant and machinery capital allowances, to claim a 100% tax deduction in the year. To qualify, expenditure must fall within the definition of ‘plant and machinery' for capital allowance purposes. This covers farming equipment such as combines, tractors, and other farm machinery, but it also could include laptops and other office equipment, vans, and lorries. However, the AIA does not apply to purchases of cars.

Other important and sometimes overlooked qualifying plant and machinery are parts of buildings and structures which are not immediately obvious as separate assets. This includes aspects of the building itself, including heating, lighting, power, hot and cold water installations, sanitary fittings and kitchens.

The rate of £1 million has been in force since 1 January 2019 and is anticipated to end on 31 December 2021. As it stands, the AIA is due to return to the reduced rate of £200,000 for qualifying expenditure from 1 January 2022, considerably lower than the current rate. There are transitional rules which are particularly strict when the AIA limit decreases, detailing when spending can occur within the financial year, which could be disadvantageous to businesses, resulting in unexpected restrictions in the tax relief available.

This example sets out the impact of the rules for a March 2022 year end:

The first step is to calculate the AIA that would be available for two notional periods on either side of the change in rate. The total AIA would be calculated as:

• Nine months ended 31 December 2021: (9/12) x £1,000,000 = £750,000
• Three months ended 31 March 2022: (3/12) x £200,000 = £50,000

An AIA of £800,000 is available to a business for the year ended 31 March 2022. However, the notional period commencing on 1 January 2022 has its own maximum.

The maximum AIA for this second notional period is the time-apportioned amount calculated above. So, for the year ended 31 March 2022, the following AIA maximums apply:

• Year ended 31 March 2022: £800,000
• Three months ended 31 March 2022: £50,000

Were a business with a year ending 31 March 2022 to incur £600,000 of qualifying expenditure in the nine months ending 31 December 2021 and £250,000 in the three months ended 31 March 2022, the restriction on the second notional period would mean that only £650,000 of expenditure could be written off immediately using the AIA.

Businesses with large capital expenditure in straddling periods will therefore need to be careful. As a hypothetical example, were a business with a March 2022 year end to incur all of its capital expenditure of £800,000 between January and March 2022, it could only utilise £50,000 of AIA.

Accordingly, we would recommend planning your capital expenditure carefully and getting in touch with your Accountants if you are considering purchasing any high value capital assets, to maximise the tax relief that might be available. A day one way or the other could have a considerable impact on the timing of the tax relief.

Additionally, Chancellor Rishi Sunak announced a package of capital allowances measures in the 2021 Budget designed to stimulate business investment as part of the economic recovery following the coronavirus pandemic. These are however only available for companies, with other businesses, such as sole traders, partnerships and LLPs, excluded. These include a two year ‘super-deduction’ of up to 130% tax relief on some qualifying plant and machinery, or a temporary first-year allowance for other assets on investments made between 1 April 2021 and 31 March 2023. This increase in the tax relief for companies is also intended to stop companies deferring capital expenditure to maximise the tax relief available once the increased in the rate of corporation tax to 25% comes into effect from 1 April 2023.

It’s important to keep speaking with your advisers, to ensure that as a business you maximise the cash benefits of the reliefs available, in this increasingly complex area of the tax legislation. To discuss your tax position and any expenditure you may be planning, get in touch with our specialist Construction & Property Incentives team.