The AIA permits businesses to claim in-year tax relief in full on certain capital expenditure. Where the value of expenditure exceeds the AIA (or where the AIA is not otherwise available), relief can broadly only be claimed on up to 18% of the expenditure each year.
The AIA has fluctuated in recent years and was increased from £200,000 to £1m on 1 January 2019. It was due to revert to £200,000 on 1 January 2021 but will remain at £1m until 1 January 2022following this announcement.
The move will be a welcome for businesses looking to invest in capital expenditure over the coming year. The extent to which the £1m AIA is available may depend on the timing of expenditure and a company’s year-end. For a limited company spending £1m on qualifying assets, there are potential corporation tax savings of up to approximately £125,000 compared to if the AIA had been reduced as planned.
The Association of Tax Technicians (“ATT”) recently called for an extension to the £1m AIA as a response to the COVID-19 pandemic, which may have prevented many businesses from investing and utilising the £1m allowance as they otherwise would have planned to.
The intention of the extension to the £1m AIA is clearly to support businesses with their investment plans as the financial recovery from COVID-19 continues into the new year, with the aim that this contributes to wider economic growth.
The capital allowances regime can be complex, and there are wide-ranging rules covering what capital expenditure and which assets are eligible for tax relief. The timing of expenditure and contractual terms can also impact on the available relief, so care should be taken when planning the acquisition of high value plant and machinery and incurring other significant capital expenditure.
If you would like to discuss how the extension to the AIA may benefit your business, please get in touch with your Claritas contact.
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