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Maximising capital allowance claims

Author: Dean Needham

Published: 04 Oct 2021

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Dean Needham explains how the timing of investment expenditure can affect the level of tax relief available, as the annual investment allowance (AIA) reverts to the pre-pandemic level of £200,000 on 1 January 2022 and transition rules will apply to accounting periods straddling that date.

The annual investment allowance (AIA) is a form of capital allowance designed to encourage businesses to invest on a yearly basis. It allows for same-year 100% tax relief on qualifying asset costs to be deducted from profits up to an annual limit.

Currently, the annual limit for AIA is a generous £1m. However, this was a temporary level brought in from 1 January 2019 to stimulate investment. Initially, it was due to revert to £200,000 on 1 January 2021; it has now been extended to help post-pandemic recovery. As a result, the annual limit is set to revert to £200,000 from 1 January 2022.

Any change in the AIA limit creates challenges when planning investment for the transition period, yet such a significant reduction makes this planning more critical than ever.

Transitional rules

Whenever there is a change in AIA, transitional rules must be applied when calculating the amount available for accounting periods that straddle the transition date.

As an example, a limited company with a 30 June 2022 year end has six months of the accounting period that falls under the £1m AIA limit (1 July 2021-31 December 2021) and six months of the accounting period that falls under the £200,000 AIA limit (1 January 2022-30 June 2022).

The first rule imposed on this transitional period is an overall cap on the AIA available for the accounting period. Extending the example above, the AIA for said company is calculated as follows: £1m x 6/12 (six months of £1m AIA) plus £200,000 x 6/12 (six months of £200,000 AIA).

Therefore, the maximum AIA available is £600,000 for the period ending 30 June 2022. The following table shows the maximum AIA available for an accounting period depending on when the 12-month accounting period ends.

12-month accounting period ending (2022)

Maximum AIA (cap)

31 January

£933,333

28 February

£86,667

31 March

£800,000

30 April

£733,333

31 May

£666,667

30 June

£600,000

31 July

£533,333

31 August 

£466,667

30 September

£400,000

31 October

£333,333

30 November

£266,667

31 December

£200,000

The second rule is a further cap on expenditure incurred on or after 1 January 2022. The cap for the 30 June 2022 example company is calculated as follows: £200,000 x 6/12 (six months of £200,000 AIA). Therefore, the maximum AIA available on expenditure incurred between 1 January 2022 and 30 June 2022 is £100,000.

Although the maximum AIA available in this example accounting period is £600,000, for expenditure incurred in the first six months of the calendar year 2022, the AIA is capped at £100,000.

The following table shows the AIA cap for expenditure incurred after 1 January 2022, depending on the end of the 12-month accounting period.

Accounting period ending (2022)

Maximum AIA for expenditure incurred on or after 01/01/2022 (cap)

31 January

£16,667

28 February

£33,333

31 March

£50,000

30 April

£66,667

31 May

£83,333

30 June

£100,000

31 July

£116,667

31 August 

£133,333

30 September

£150,000

31 October

£166,667

30 November 

£183,333

31 December

£200,000

Planning points

Based on the above rules and tables, it is clear that if any capital investment is expected for accounting periods that straddle the AIA change on 1 January 2022, there should be careful planning to get the most effective use of the tax relief available.

As an example, for a company with a 12-month accounting period ending 31 January 2022, the maximum AIA limit for the year is £933,333. However, if any significant capital expenditure were incurred in the one month after 1 January 2022, that expenditure would only benefit from an AIA limit of £16,667. This will result in a much slower realisation of tax relief.

In all accounting periods, the maximum AIA available is for expenditure that has been incurred on or before 31 December 2021. For example, a company with an accounting period ending 30 June 2022 will have a £600,000 AIA, and the full £600,000 can be used against all expenditure incurred on or before 31 December 2021 (ie, you are not restricted to the £500,000 for this six-month period). This should be considered when planning investment.

It is also worth noting that AIA should be used against special rate pool expenditure as a priority in almost all circumstances (for example, integral features such as lifts, electrical systems and air-conditioning systems and long-life assets, but not cars). Special rate expenditure has slower writing down allowances (WDA) of 6% per annum. Therefore, to maximise tax relief at the earliest opportunity, it should be used in preference to general pool expenditure, which gives a more generous WDA of 18% per annum. This is another crucial planning point.

Interaction with the new 130% super deduction and 50% first year allowance

Up to 31 March 2023, other tax relief incentives may offer comfort from the AIA transition period rules.

First is the new 130% super deduction. This relief is uncapped, meaning there is no limit on the amount of qualifying expenditure that can be claimed in the relevant tax year, unlike the AIA limits detailed above.

It also allows an additional 30% boost on top of existing capital allowances. However, it is only available for companies on general pool expenditure, and the plant must be brand new and unused.

Second is the new 50% first year allowance (FYA) for special rate expenditure. This again offers an uncapped additional 100% FYA on 50% of special rate pool expenditure value. Similar rules apply as per the super deduction; it is only available for companies, and the plant must be brand new and unused.

As these new reliefs are uncapped, they have the potential to fill in for the AIA reduction from 1 January 2022. In the case of the super deduction, it may be worth prioritising qualifying general pool expenditure, using the super deduction to benefit from the 30% boost to the tax-saving and to preserve the AIA for other expenditure in the year.

When planning capital investment over the AIA transition period, these new reliefs should be considered to ensure the maximum benefit is enjoyed by using the most tax-efficient allowance against the correct expenditure.

Please see HMRC guidance for full details, qualifying criteria and conditions of the two new allowances.

To conclude

The transition period around the AIA limit change should be given careful consideration. In light of the above factors, investment planning is needed to ensure capital investment is the most tax-efficient possible in the next year.

Editor’s comment:

At the Autumn Budget on 27 October 2021, it was announced that the government will legislate in Finance Bill 2021-22 to extend the temporary £1m level of the annual investment allowance until 31 March 2023.

About the author

Dean Needham, Capital Allowances Technical Team Manager, CATAX