Forthcoming Changes – Annual Investment Allowances (AIA)

October 21, 2020

As you are no doubt aware the Annual Investment Allowances (AIA) allows a business to claim 100% tax relief on certain items of plant and equipment.  The maximum allowance is currently set at £1,000,000 however this is set to reduce to £200,000 from 1 January 2021. 

Transitional rules will apply to accounting periods which span the 1 January 2021 change.  A calculation is required to determine the maximum allowance which is due for the whole accounting period but there is also a restriction on the amount of AIA which can be claimed for expenditure incurred on or after 1 January 2021.  It is therefore crucial that consideration is given to the timing of expenditure to ensure that any tax relief is maximised.    The impact of this change is illustrated below with a simple example.

A Limited has a year end of 31 March 2021. 

The maximum AIA which would be available is £800,000 and this is calculated as follows:

Period 1 April 2020 to 31 December 2020 £1,000,000 x 9/12 750,000
Period 1 January 2021 to 31 March 2021 £200,000 x 3/12 50,000
Maximum AIA for the whole period to 31 March 2021 800,000

An AIA of £800,000 would be available to A Limited.  However, the period commencing on 1 January 2021 has its own maximum of £50,000.  Therefore, if A Limited incurs £600,000 of qualifying expenditure in the nine months ending 31 December 2020 and £250,000 in the three months ended 31 March 2021, only £650,000 of the expenditure could be written off immediately using the AIA.   If the total amount of expenditure was incurred during the nine months to 31st December 2020, the company could have offset a full £800,000 against the capital expenditure, thereby accelerating the tax relief available.

You can therefore see how important it is to ensure that the timing of any proposed significant capital expenditure is given careful consideration as this can have a significant impact on the amount of AIA which can be claimed.

We would recommend that you contact us to discuss the timing of any capital expenditure which you have planned over the coming weeks to ensure that the use of the AIA is maximised.

For further information or advice please contact:

Rachel Warriner (Head of Corporate Tax)
T: 0191 256 9500

The information contained herein is of a general nature and is not intended to be received as formal professional advice. Whilst we endeavour to provide accurate information, there can be no guarantee that the information is accurate as of the date it is received, or that it will continue to be accurate in the future, due to legislative changes. It is therefore important that before you act upon any information contained herein you seek appropriate professional advice to take account of your exact circumstances.


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