Businesses warned on drop in annual investment allowance

Businesses considering the purchase of capital equipment need to think quickly or risk missing out on significant amounts of tax relief over the next few years, the Association of Taxation Technicians (ATT) is warning

Although the timing of a purchase may make no difference in the long run to the amount of expenditure which qualifies for tax relief, it can make a significant difference to how quickly that relief is received and the contribution that the relief can make to the cash flow of a business.

The annual investment allowance (AIA) is expected to fall from £1m to £200,000 on 31 December 2020, meaning that if a business incurs significant expenditure on plant and machinery before the end of 2020, it is likely to get tax relief on the cost much earlier than if the purchase is made in the new year.

As an example, a limited company with a year end of 31 March which has spent very little on plant and machinery during the pandemic but now plans to spend £500,000 on qualifying items would get tax relief on the whole cost in one go,  and benefit from a £95,000 reduction in its corporation tax bill on 1 January 2022, if it made the purchase by the end of December.

However, making the same purchase in the first three months of 2012 would see the tax saving available on 1 January 2022 plummet from £95,000 to just under £25,000. It would take another ten years of drip-fed relief before the company had received tax relief on 90% of its outlay.   

If, however, the company delayed that same purchase until its April 2021 – March 2022 accounting year, the resulting corporation tax reduction for that year would be some £48,000.

In that scenario, it would take another eight years for the company to gradually receive tax relief on 90% of its outlay, ATT calculated.

Jeremy Coker, ATT president, said: ‘Many businesses will have deferred decisions about purchasing capital equipment this year because of the enormous uncertainties created by the pandemic.

‘For any which are considering such purchases now, the scheduled ending of the temporary increase in the AIA in two months’ time introduces an unwelcome additional complexity. 

‘With all the other pressures on the Treasury at the moment and the postponement of the Budget, the temporary increase in the AIA looks like it will come to an end as originally planned on 31 December 2020.

‘This makes it important for businesses to plan the timing of any significant amounts of capital expenditure particularly carefully and to take appropriate professional advice.’

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