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Planning for the Temporary Increase in Annual Investment Allowances

Annual Investment Allowances seem to have become a favourite tool for successive Chancellors to tinker with the tax system in recent years.

The latest Budget saw an announcement of a temporary increase in the Annual Investment Allowance (AIA) to £1,000,000 which will apply from 1 January 2019 to 31 December 2020.

There are a limited number of businesses that will be affected by the change, but for those that are, this could have a significant influence on the timing of large capital purchases.

As always with changes to capital allowances, if your accounting period runs to the date of change, i.e. calendar year in this case, then the rules are straightforward to understand.  However, if your accounting period straddles 1 January then some careful planning may be required.  Should your expenditure be accelerated or should it be deferred? The following two examples illustrate some of the issues:

Example 1

Root Ltd has a June year end.  For the year ending 30 June 2019 the maximum AIA available will be:

1 July 2018 to 31 December 2018 (6/12 x £200,000) 100,000

 

1 January 2019 to 30 June 2019 (6/12 x £1,000,000)

 

500,000
£600,000

 

If Root Ltd were anticipating incurring capital expenditure of £550,000 in the year and all of that expenditure took place after 31 December then it would receive 100% first year allowance on the whole expenditure.

If, on the other hand, the expenditure all took place before 1 January the AIAs available would be limited to £200,000, the balance of the expenditure going into the general pool and qualifying for 18% writing down allowance.

Thus, in this example there is a significant increase in allowances that can be achieved by deferring the expenditure to after 1 January.

Example 2

Moeen Ltd has a year end of 31 March.  The company is planning on acquiring a piece of equipment that will cost £500,000.  The maximum AIAs in the accounting period will be:

1 April 2018 to 31 December 2018 (9/12 x £200,000)

 

150,000

1 January 2019 to 31 March 2019 (3/12 x £1,000,000)

 

250,000
£400,000

 

If the company were to purchase the equipment before 1 January they would be limited to AIAs of £200k (assuming no other capital expenditure); if the purchase is made after 31 December, but before 1 April the company will be able to claim AIAs of £400k; whereas if the expenditure were incurred post 31 March, AIAs could be claimed on the whole £500k.

However, the company would also need to consider what further capital expenditure might be planned for the year to 31 March 2020. There could be a fine balance at play here.

Hence, there is not one rule that will fit all circumstances.  The decision on timing will be influenced by year end, the value of the anticipated purchase and the quantum of other expenditure in the accounting period in question (not to mention the small matter of cash flow).

If you want to explore the issues raised by this article in more detail please contact Brian Jukes on 02476 221 046.