Temporary increase in Annual Investment Allowances (AIA)
The annual investment allowance enables businesses to claim accelerated tax relief of 100 per cent on qualifying costs in the first year up to a prescribed limit. The budget temporarily increased the limit from £200,000 per annum to £1m per annum.
This will provide businesses with additional relief in year 1 of up to £730,000 compared to the current position. This change takes effect from 1 January 2019 and will last until 31 December 2020. Where accounting periods straddle these dates, the AIA limit will be apportioned accordingly.
This change is very welcome and will have a significant impact on the tax relief available for small and medium sized businesses undertaking investment projects. For many mid-market businesses, this will allow them to claim a significant proportion of the qualifying costs associated with a relocation, renovation or construction of a new premises in the year of investment. Currently, it can take between 15 and 25 years for all qualifying expenditure to be relieved.
Businesses with planned investment in Q4 of 2018 may want to consider delaying their projects until the AIA rises, thereby allowing them to take advantage of the higher threshold and potentially increase their first year tax savings.
Structures and Buildings Allowance (SBA)
The budget introduced additional tax relief for new capital expenditure on acquiring, constructing or refurbishing buildings and structures. This follows a recent Office of Tax Simplification (OTS) consultation that recommended widening the scope of capital allowances and allowing tax relief for the cost of buildings and similar assets.
Relief will be given at 2 per cent per annum on a straight line basis – allowing all costs to be relieved over a 50 year period, with the exception of the cost of Land which not attract any relief. The rate of relief is intended to mirror the economic life of the assets covered. Expenditure qualifying for SBA will not be eligible for the annual investment allowance, meaning businesses will not be able to accelerate their SBA expenditure into the first year.
When an asset is disposed of, it is proposed to restrict the capital gains base cost by the amount of any SBA that has been claimed. The amount of SBA available to any future owner will also be restricted based on the original cost and SBA already claimed.
Whilst we welcome the extension of the scope of capital allowances, the 2 per cent rate of relief is relatively modest, particularly when combined with the restrictions on disposal. Taken together, this means ensuring that maximising the assets eligible for other categories (plant and machinery, integral features) remains vital for businesses.