The below has been delayed to 1 January 2022, but the same problem will occur next year. It will need thinking about during this year and in the run up to 31 December 2021, if you’re looking to spend a significant amount on allowable assets.
Until 31 December 2020 the Annual Investment Allowance is £1 Million, this date was not extended in the March 2020 Budget hence it falls to its previous level of £200k on 1 January 2021.
However, anyone who’s accounting year straddles 31 December 2020 could well fall foul of the transitional rules which apply when the allowance falls if they do not time their capital expenditure correctly.
So, taking a rather popular year end of 31 March.
Your accounts year to 31 March 2021 of course straddles 31 December 2020.
So, it is split into 2 periods to calculate the maximum AIA available.
1 April 2020 31 December 2020, £1,000,000 x 9/12 = £750,000
1 January 2021 31 March 2021, £200,000 x 3/12 = £50,000
Max AIA’s available £800,000
So, you would think so long as eligible capital additions were no more than £800K in the full year to 31 March 2021, then you would be entitled to full tax relief on the expenditure.
But that’s not how the rules work.
If £800K is spent in the period before the allowance falls (31 December 2020) then full relief is available.
But in the period after the change, full relief is limited to the apportioned AIA allowance for that period so in this example £50,000.
So, at that the extreme if £800K was spent after 31 December 2020 and nothing pre that date only £50K would eligible for full relief and the balance only to Writing Down Allowances of 18% or 6%.
Bearing in mind lots of business after leave capital spend to the end of their accounting, periods – this may not be the best for tax purposes for this one year and hence if you are thinking of making fairly significant capital purchases in your accounts year that ends in 2021 then please review the position with us – sooner rather than later.
