Capital allowances – timing is key to take advantage of new £1m allowance

Businesses wanting to take advantage of the £1million Annual Investment Allowance must plan their capital expenditure carefully.

In his 29 October Budget, Chancellor Hammond announced an increase in the Annual Investment Allowance (‘AIA’) from £200,000 to £1million with effect for expenditure incurred on or after 1 January 2019.

The new limit is in place for a period of two years, ending 31 December 2020.

As with previous changes to the AIA limit, companies need to pay close attention to the timing of their capital expenditure if they are to make the most of the changes.

The AIA is applied to a business’s financial year. So, if your business has a 31 March year end, the available AIA for the year ending 31 March 2019 will be £400,000. 

This is calculated as follows:

• For expenditure incurred on or before 31 December 2018 the AIA will be £150,000 (£200,000 x 9/12);
• For the period to 31 March 2019 the AIA will be £250,000 – (£1million x 3/12);

For the following year ending 31 March 2020, the AIA will be the full £1million.

So, if you are considering a capital purchase of £400,000, this should be deferred until after 31 March 2019, if this is commercially possible, so that the full amount would fall within the new £1million AIA limit.

If, however, the purchase needs to be made in the current financial year, and assuming that no capital expenditure has already been made, only £150,000 of the cost would be eligible for AIA if the purchase is made before 31 December.

If the purchase is delayed until after 1 January 2019 only £250,000 of the expenditure would be eligible for AIA. In these circumstances the balance not covered by the AIA would qualify for a writing down allowance, which would give relief but over an extended period.

Companies should carefully review the rules and calculate the company’s entitlement to AIA.

Once you have established your entitlement to AIA, you can then plan your capital expenditure for the coming years to maximise the tax relief.

Please note that the above apportionment rules will apply ‘in reverse’ when the limit reduces as expected on 1 January 2021.

Please also remember that the limit applies to a single company. In group situations the limit is divided between the active companies, but the group can decide which of the group companies will have the AIA as there may be a preferred recipient.