£1m Annual Investment Allowance Extension

HM Treasury announced on 12 November 2020 that the £1m cap on the Annual Investment Allowance (AIA) is to be extended until 31 December 2021.

AIA Extended

The AIA – aptly named the ‘yo-yo allowance’ - initially increased from £200,000 to £1m on 01 January 2019 and was due to revert back to £200,000 from 01 January 2021. However, it has now been announced that this temporary increase to the £1m capped amount will remain in place for an additional year.

Background

AIAs give businesses tax relief on 100% (up to the annual cap for that period) of the majority of costs qualifying capital allowances expenditure in the year it is incurred.

Allowances are usually calculated annually as writing down allowances on a reducing balance basis, meaning that the relief is spread across a number of years. Currently at 18% p.a. for Plant and Machinery Allowances and 6% p.a. for Integral Features Allowances. Thus the opportunity to benefit from 100% relief in the year of expenditure can dramatically accelerate the immediate tax savings and boost cash flow.

For those businesses where their accounting period ends on a date other than the date at which the limit changes (i.e. 31.12.YY), the AIA cap is adjusted pro rata to the different levels of cap for each part of the accounting period. For example:

AIA Extended

AIAs are not available to Trusts or Partnerships where one or more of the constituent members are Limited companies – a measure introduced to combat wider tax abuse. Additionally, the relatively newly created Structures & Buildings Allowances (SBAs) are also excluded from being eligible for treatment as AIAs and thus can not be accelerated from their normal 3% per annum straight line relief over 33⅓ years.

Papering over the cracks?

The increased AIA extension is welcome news for businesses during a time when many are looking for ways to stabilise their bottom line and manage cash flows. A call that many advisers and professional bodies have been making in the industry for a number of months. However, it does pose the question of how much difference a single year’s extension can make? The Government’s original reason for increasing the AIA cap back in the Autumn 2018 Budget statement for 2019, along with other measures introduced, was to stimulate investment in the UK real estate sector, and make the UK a destination for investment over other top European countries – as a BREXIT measure. Though, with almost an entire year lost to the Covid-19 pandemic, investors need time to regroup, plan and then implement further investment changes.

The vast majority of projects, even at relatively modest spends, take far longer than one year to conceptualise, design, obtain planning permission, raise finance and build out.

In order to really stimulate growth of investment in real estate (and the wider economy) throughout the UK, the Government need to give investors a clear timeframe in which they can implement their projects. Thereby we would really like to see a more sustained extension of say, three or five years that would facilitate a far greater range of projects to qualify for AIAs, allowing businesses to truly benefit from this fiscal incentive and grow their businesses in the longer term.

Further action

If you would like to discuss Annual Investment Allowances or wider Capital Allowances queries with one of our team, do get in touch as soon as possible. Early advice on any matter should provide an ability to discuss the most comprehensive options available in moving your project forward and achieving the optimal tax savings potentially available.

If you have any property tax issues please do get in touch for a no obligation discussion. You can phone the team on 0345 230 6450 or email healthcheck@e3consulting.co.uk.

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