Annual Investment Allowance extended

by | Feb 4, 2022

ABG are a multi-award winning firm of Chartered Accountants and Tax advisers with offices in London EC1.  ABG have been providing expert tax advice for more than 55 years. In this blog post our Tax Consultant, Tim Palmer, takes a look at the  extended Annual Investment Allowance (AIA) and how this impacts on the tax affairs of the self-employed, partnerships and companies.

What do we know about the Annual Investment Allowance extension? 

The government has temporarily extended the AIA limit from £200,000 to £1million for qualifying expenditure on plant and machinery in an accounting period, from 1st January 2022 to 31st March 2023. This allowance is available to self-employed taxpayers and partnerships, as well as companies. It was due to be decreased back down to £200,000 on 31st December 2021, so this extension is very welcome.

What is Annual Investment Allowance?

The AIA is 100% capital allowances for expenditure on plant and machinery up to a maximum annual limit of currently £1million. The AIA is not available on certain plant and machinery, such as cars.

Some companies are not claiming their super deduction SDFYAs of 130% on their new plant expenditure. They are worried that the balancing charge of the proceeds times 130% cannot be sheltered by their big general plant pool tax written down value brought forward if they claim the SDFYA. Companies are therefore claiming the AIA instead.

Transitional rules will come into play if a company has an accounting period that overlaps the operative date of 1st April 2023 for the reversion of the AIA limit to £200,000. Under the legislation, the maximum AIA available will be calculated in two parts, with apportionments made on a just and reasonable basis.

  1. The AIA available based upon the £1million temporary limit for the proportion of the accounting period falling before 1st April 2023.
  2. The AIA available based upon the £200,000 limit for the proportion of the accounting period falling on or after 1st April 2023.

Example

Sun and Rain Ltd have an accounting period ended 31st December 2023

Based only on these transitional rules and apportioning by reference to the number of months, the maximum AIA available to Sun and Rain Ltd would be £400,000, which is calculated as follows:

  1. The period from 1st January to 31st March 2023: £1,000,000 x 3/12 months = £250,000; and
  2. The period from 1st April to 31st December 2023: £200,000 x 9/12 months = £150,000.

Accordingly, the total AIA, available to Sun and Rain Ltd for the year ended 31st December 2023 is £400,000.

1st April 2023 onwards is going to be a tough time fiscally and financially for companies. The corporation tax rate goes up to 25% (a 6% increase) and the super deduction 130% FYAs finish on 31st March 2023. Additionally on that date, the AIA reverts back down to £200,000.

Tougher years ahead for companies with higher tax rates and lower corporation tax reliefs.

From 1st April 2023, a 6% increase in corporation tax will be introduced for larger companies, increasing their corporation tax payable from 19% to 25%.

The forthcoming increase in corporation tax will mean that a company employer needs to plan ahead!

It is therefore very important for companies to plan ahead, and make the best tax claims, linked to the forthcoming rise in corporation tax.

If you wish to speak to a member of our tax team regarding the Annual Investment Allowance (AIA) or the Super Deduction, please contact us on 020 7330 0000.

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