21 November 2018

CAPEX: Ensuring the time is right

What does the new increase in Annual Investment Allowance (AIA) mean for businesses?

In order to help stimulate business investment, the recent budget announced that the Annual Investment Allowance (AIA) will increase from £200,000 to £1,000,000 from 1 January 2019.

The increased AIA will allow businesses to deduct the full cost of qualifying plant and machinery purchased up to £1,000,000 when calculating its taxable profits for the year.

For the accounting period ended 31 December 2019, the full £1,000,000 AIA will be available.  However, for companies that don’t have a 31 December year end, the changes to the AIA are not as simple as they seem. 

A calculation needs to be undertaken to determine the amount of AIA the company is entitled to; for part of their accounting period, they will be entitled to £200,000 of AIA per year,and for the remainder, they will be entitled to £1,000,000. 

In this instance we need to apportion the AIA on a monthly basis.  Let’s look at the implications of this for a company with a 31 March 2019 year end.

The company is entitled to 9 months at the £200,000 AIA limit, up until 31 December 2018 
i.e. (£200,000/12) X 9 = £150,000

The company is entitled to 3 months at the  £1,000,000 AIA limit, from 1 January 2019 to 31 March 2019
i.e. (£1,000,000/12) X 3 = £250,000

Total = £400,000

If this company has spent £200,000 on qualifying plant and machinery from 1 April 2018 to 31 December 2018, and £50,000 from 1 January 2019 to 31 March 2019 - we can only take 100% tax relief of up to £150,000, as the company only has £150,000 of AIA in the period to 31 December 2018, despite spending £200,000 in this period.

The remaining £50,000 will receive tax relief at 18% writing down allowances year on year. The company can take 100% tax relief for the £50,000 spent from 1 January 2019 to 31 March 2019, as this does not breach their £250,000 AIA for this period.

We can see that the timing of expenditure is crucial, as despite the fact the AIA for the full year is £400,000, the company spent £250,000 and only received £200,000 of AIA.

Businesses should carefully consider the tax implications of the timing of their capital expenditure. The AIA will only increase to £1,000,000 for 2 years until 31 December 2020 and is expected to reduce considerably after this date. 

Businesses that are considering large capital projects in the next few years, should seriously consider pulling these forward to ensure they can maximise tax relief available. 

On the other hand, businesses that have a year end in the earlier months of 2019, should consider the timing of any current capital expenditure, as delaying this by a couple of months may result in additional tax relief.

Please get in touch if you would like to discuss the tax implications arising from changes to AIA and your capital expenditure.