As things stand, the Annual Investment Allowance (AIA) of £1m is due to reduce to £200k from 1 January 2021. I have previously set out some of my thoughts on potential Budget measures (COVID-19 – who pays for the recovery, Tax mitigation ahead of the Budget) – it’s possible that this reduction in allowance does not happen given the need to stimulate the economy, but as it stands today the changes are due to take effect as proposed.
How the AIA works
If you are a business and you buy certain assets (plant or machinery) to use in your business, you cannot ordinarily deduct the cost of those purchases from your profits to establish your taxable profit. Instead, you can claim capital allowances, which essentially acts as a set rate of tax depreciation. The AIA is an enhanced rate of deduction which means you can get 100% tax relief in the year of purchase on a qualifying asset. However, not all assets qualify for AIA, cars, for example, are excluded, although if you were to buy certain low emission cars there may still be a 100% first-year allowance available. The rules get complicated when the AIA reduces if your business year-end isn’t 31 December and there’s a calculation to perform to work out the AIA entitlement.
Whilst the AIA has been set at a generous £1m for the last two years, the reduction to £200k in January means that businesses making use of this enhanced allowance are well advised to consider making any qualifying purchases before 31 December 2020 to maximise their tax relief.
As noted above, in the current climate it is, of course, possible that the enhanced AIA might be extended but as that’s not guaranteed, we’d be happy to talk through your options with you. Just contact your usual Sagars team member or get in touch with tax partner, Kate Naylor, by email or phone 0113 297 6825.