Since this article was published, the Government has announced a 12 month extension to the £1 million temporary cap.
In the current uncertain economic environment, investment may not be at the top of your agenda, however, there is a limited time to maximise the tax reliefs available for capital expenditure.
The annual investment allowance (AIA) provides a 100% tax deduction for qualifying expenditure on plant and machinery in the year that it is incurred. The AIA is currently at a level of £1 million until 31 December 2020, after which time it will decrease to £200,000. Expenditure above this level will receive relief at a maximum rate of 18%.
When planning the timing of expenditure, the business needs to consider its accounting year end date and the timing and amount of other expenditure it has incurred in the financial year.
Transitional provisions
The year end of the business incurring the expenditure needs to be considered to establish the maximum amount available.
- A qualifying business with a year-end of 31 December will be entitled to the full £1 million allowance in the year ended 31 December 2020.
- Qualifying businesses with any other year-end date will only be entitled to a pro rata amount of the increased allowance, depending on their year-end.
For example, a business with a March year end would be entitled to a maximum of £800,000 AIA for the year 1 April 2020 to 31 March 2021 (i.e. 9/12 x £1 million plus 3/12 x £200,000). However, during the period 1 January 2021 to 31 March 2021, no more than £50,000 could be incurred to qualify for the AIA.
In this example, therefore, incurring the expenditure before the end of the calendar year would likely be more beneficial. The increased allowance could result in creating a tax loss for the business which can be carried back to set against prior year profits and result in a tax refund but, at a minimum, will reduce the taxable profits and hence the tax liability of the business.
Date of purchase
If an asset is being purchased outright, with no finance, the acquisition date for tax purposes is the date that the invoice is issued. However, extended payment terms cannot be available. If there is a gap of more than four months between the invoice date and the date on which payment is required to be made, the expenditure is not deemed to have been incurred until the later date.
If an asset is being acquired with hire purchase, the acquisition date for tax purposes is the date that the asset is brought into use. Therefore, the plant or machinery must have been delivered before the year end for a tax deduction to be obtained. Additionally, the hire purchase must be on ‘normal’ payment terms.