How to avoid the Annual Investment Allowance trap

Category: Property & ConstructionTaxation - Posted On: May 7 2019


Following on from our previous article regarding the recent changes in the Annual Investment Allowance (AIA), businesses need to be careful as any qualifying capital expenditure falling within the allowance could be eligible for 100% tax relief. Below is a more detailed explanation of how you can avoid the AIA trap.

On 1 January 2019, a temporary increase in the AIA was introduced, increasing it from £200,000 to £1,000,000 per annum. It is set to decrease back to £200,000 per annum from 1 January 2021. These changes are very straight forward for businesses with a year end of 31 December, however, other businesses need to be aware of the transitional rules in place.

This temporary increase will benefit the construction sector, but as most buyers know, the purchase of any expensive plant and machinery is usually planned well in advance so the 1 January 2021 deadline may arrive sooner than you think.

For example, a business with a 30 April 2021 year end has an AIA available of £733,333 (8/12 x £1,000,000 + 4/12 x £200,000).

If they plan to purchase an excavator for £300,000 in 2021, the business may assume that this expenditure will all be covered by their AIA regardless of when in the year they purchase it. If they go ahead and purchase the excavator on 1 January 2021, they will actually only be allowed to use £66,667 of their AIA because they purchased it between 1 January 2021 and 30 April 2021 (4/12 x £200,000).

This shows that businesses need to be proactive with their accountant when they are planning large amounts of capital expenditure. In the above case, our EQ Property and Construction specialists would advise the company to purchase the excavator in December 2020, as the the full amount would qualify for AIA (up to £733,333).

If you would like further information on AIA, and the amounts that can be claimed, please email our EQ Property & Construction team at info@eqaccountants.co.uk or contact one of our offices.