From 1 January 2019, the annual investment allowance (AIA) will increase from £200,000 to £1m until 31 December 2020.
What is the annual investment allowance?
The AIA allows businesses to claim accelerated tax relief on qualifying capital expenditure (for example plant and machinery). Under the current UK tax rules, ignoring AIA, it can take up to 36 years for a business to write-off 95 per cent of the cost of capital assets for tax purposes – for example:
- a business spends £1m on installing new lighting, heating and air-conditioning in their offices;
- normally this would qualify for capital allowances in the special rate pool (currently attracting relief at 8 per cent per annum, decreasing to 6 per cent from April 2019 and extending the write-off period);
- in year one, the business could claim £80,000 (£1m x 8 per cent) capital allowances against its taxable profits, with allowances in future years calculated on a reducing balance basis;
- using the AIA, the full £1m cost could be relieved in year one – delivering an acceleration of tax relief on £920,000.
Key features of the annual investment allowance
The AIA is only available for new expenditure – the AIA must be claimed in the year the expenditure is incurred (ie use it or lose it). Otherwise, the relief defaults to the ‘normal’ capital allowances rates, spreading the relief over many years.
Not all expenditure qualifying for capital allowances is eligible for the AIA – notable exceptions include cars, and buildings costs that do not qualify for plant and machinery capital allowances. New buildings and improvements to existing buildings may, however, qualify for the new structures and buildings allowances.
Finally, where an accounting period straddles 1 January 2019, the available AIA will be apportioned such that the amount of expenditure that qualifies for the AIA is reduced.
What should businesses do?
Businesses expecting to incur significant capital expenditure in the next two to three years should consider planning their expenditure to make sure it falls in an accounting period where the increased AIA will be available. Where qualifying expenditure is likely to exceed £1m, it may be beneficial to stagger the expenditure across multiple accounting periods, to take advantage of the AIA for each period, thereby accelerating the relief further.
Identifying capital expenditure on building projects that qualifies for capital allowances, including the AIA, is a complex area that generally requires input from a specialist capital allowances surveyor. However, identifying such qualifying expenditure, ideally up-front to ensure utilisation of the AIA is maximised and first year allowances on certain specific qualifying costs are claimed, can significantly accelerate tax relief and enhance cash flow.