Time running out on the £1m Annual Investment Allowance

02 Nov 2020

It is now more critical than before to consider the timing of capital expenditure as there are significant tax advantages available, as the deadline approaches.

tractor-plowing (2).jpg

The Annual Investment allowance (AIA) offers 100% tax relief on purchase of qualifying plant and machinery or integral features subject to the annual limits.

Since 1 January 2019, the annual limit was temporarily increased to £1million from £200,000 previously. This temporary increase ends on the 31 December 2020 and from 1 January 2021, the AIA limit will be £200,000.

For a business operating a 31 March 2021 year end, there would be £750,000 available between 1 April 2020 and 31 December 2020, and £50,000 for the remainder of the year. The critical issue is that qualifying expenditure is restricted to £50,000 for the final three months of the financial year.

If an unincorporated farm business with a 31 March year end, purchased a new tractor and new machinery costing £90,000 before 31 December 2020; it would receive a net allowance of £90,000 against its taxable profits, saving £18,000 (20% Tax) or £36,000 (40%).

If the tractor or machinery was purchased on 31 March 2021, costing £90,000, the purchase would only receive £50,000 of AIA and the remainder would receive writing down allowances at 18% being £7,200. The total amount of allowance being £57,200 and providing a tax saving of £11,440 (20% Tax) or £22,880 (40% tax).

The tax saving by timing expenditure correctly may therefore range from £6,560 to £13,120.

Based on the above example, if the farm traded as a limited company, with a March year end, leaving expenditure until 31 March 2021, may lose corporation tax relief of £6,232.

For larger items and projects, the tax impact may be greater, so there is an opportunity to consider bringing forward planned expenditure that would normally occur in the final quarter of the financial year, or may be planned post 31 March 2021.

Here to help

We would urge you to speak to your tax advisor now, to consider your circumstances and tax planning. Please do get in touch if you would like to receive some guidance.

Written by Roy Jackson | Partner & Mike Atkin | Manager

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