Despite a temporary two-year increase in the annual investment allowance (AIA), nearly two thirds of UK SMEs are not aware of the £1m tax break, which has been criticised for being over-complex due to straddling periods
In Budget 2018, the government extended the annual investment allowance from £200,000 to £1m from 1 January 2019 to 31 December 2020 to enable faster tax relief for plant and machinery investments. It is an allowance for tools and equipment, meaning a business can write off 100% of qualifying capital expenditure against taxable profits for the same period.
AIA is available for most assets purchased by a business, including machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. It does not apply to cars.
Research from Close Brothers Asset Finance has found that over half (58%) of SMEs were not aware that the government had made the increase to the allowance, while only a minority of companies (13%) were planning to significantly increase investment in 2019 as a result of the rise.
‘The AIA provides significantly faster tax relief for plant and machinery,’ said Neil Davies, CEO, Close Brothers Asset Finance. ‘However, it’s clear that more needs to be done to get the message out to business owners because the AIA was always intended as an economic stimulus by the government.’
However, the introduction of the rules did create accounting issues, unless companies had a December year end, and HMRC issued complex rules setting out compliance requirements.
Schedule 12 of the Finance Bill 2018 set out the transitional provisions which apply where a chargeable period straddles either 1 January 2019 (‘the first straddling period’) or 1 January 2021 (‘the second straddling period’).
Will Silsby, technical officer at the Association of Taxation Technicians said: ‘AIA in the final three months of the chargeable period to 31 March 2021 is restricted to the time-apportioned fraction of the normal £200,000 limit, so just £50,000.
‘For the first straddling period, the calculation is logical. The AIA cap for expenditure in the first part of the chargeable period (the months up to 31 December 2018) has to be the normal £200,000 limit regardless of the number of months in that part.
‘There is currently no provision to allow any element of under-spend in the pre-January 2021 months to be carried over into the post-December 2020 months.’
The Close Brothers survey was conducted by Lightspeed in April 2019 and canvassed 900 SME owners across the UK and Ireland.