Businesses considering investing more than £200,000 in plant and machinery could benefit from a change to the capital allowances rules in January 2019, which should allow them to obtain tax relief at an earlier time.
Capital allowances are treated as a trading expense of a particular accounting period, so they can potentially increase a loss, or turn a profit into a loss for tax purposes, which in turn, will impact on the amount of tax payable by a business. Where a business is considering expenditure on qualifying items, it may be beneficial to undertake some upfront planning.
The annual investment allowance (AIA) for capital allowances purposes is a 100% allowance for qualifying expenditure on machinery and plant. Put simply, this means that a business buying a piece of equipment that qualifies for the AIA can deduct 100% of the cost of that asset from the business’s profit before calculating how much tax is due on that profit.
VAT-registered businesses claim the AIA on the total cost of the asset less any VAT that can be reclaimed on that asset. Non-VAT-registered businesses can claim the AIA on the total cost of the asset.
The 2018 Autumn Budget confirmed that the AIA investment limit would be raised from £200,000 to £1,000,000 with effect from 1 January 2019. However, the increase will only be available for a limited period. The expectation is that the threshold will revert to its current level from 1 January 2021. For businesses with accounting periods spanning 1 January 2019 transitional rules will apply.
Businesses considering making significant investments in, say, the next five years, may wish to consider bringing their purchase forward, so as to benefit from the increased AIA limit and obtain immediate tax relief on their investment.
Where a business spends more than the annual AIA limit, any additional qualifying expenditure will still attract relief under the normal capital allowances regime, but this will result in relief being spread over several years, rather than in one go.
It is also worth remembering that connected companies are only entitled to one AIA between them.