Is your business planning on making capital expenditure this year?
The Annual Investment Allowance gives businesses the opportunity to claim 100% of their capital allowances in the year of expenditure on qualifying capital assets.
Capital allowances are an important and effective way of reducing your corporation tax liability and can be claimed when capital expenditure is incurred on qualifying business assets.
The impact of claiming is that the costs will reduce your businesses’ taxable profit and therefore the amount of tax you have to pay.
Increase in AIA for a further year
From 1 January 2019, the 100% AIA amount for expenditure on qualifying capital assets was temporarily increased. The AIA increased from £200,000 to £1 million with the measure originally due to be reversed from 1 January 2021. However, it was announced by the government on 12 November 2020 that the expiry date for the £1 million annual allowance will be extended by a further year, to 1 January 2022.
Examples of items which qualify for AIA per HM Revenue and Customs manuals :
- computers and all kinds of office furniture and office equipment
- vans, lorries, trucks, cranes and diggers
- ‘integral features’ of a building or structure e.g. air conditioning, hot water systems, electrical systems
- other building fixtures, such as shop fittings, kitchen and bathroom fittings
- all kinds of business machines, such as printing presses, lathes and tooling machines
- tractors, combine harvesters and other agricultural machinery
- gaming machines, amusement park rides
- computerised /computer-aided machinery, including robotic machines
- wind turbines and fibre optic cabling
It is also possible to capitalise on computer software, this can be treated as a tangible fixed asset for corporation tax purposes and it will be eligible for annual investment allowance.
This measure was put in place to stimulate business investment in UK manufacturing specifically. It was designed to give upfront support to businesses during continuing COVID-related uncertainty, including the current UK lockdown. Despite the measure being primarily aimed at the manufacturing sector, it is welcome news for businesses in all sectors looking to invest in plant and machinery.
By extending the limit for a further year, businesses can plan their capital expenditure over the next 12 months. This will maximise the 100% tax relief available for qualifying expenditure. Planning will also need to be considered for periods straddling 1 January 2022. The reduction to £200,000 after that date will mean an apportioned AIA limit for expenditure. Where possible, businesses should look to accelerate the relevant expenditure before this date.
We have assisted clients by analysing their expenditure and ensuring that any claim for refurbishment of trading premises is maximised. We have also spoken with contractors where necessary to ensure that any schedule of works is sufficiently detailed to make a claim.
Utilising the Annual Investment Allowance: an example
An insurance company purchased a property which had not been previously used as offices. They were looking to convert it for business purposes. We looked at the expenditure in detail and went back to the contractors where necessary. They provided more detail of the costs so we could maximise the claim where possible.
We claimed £2m of additional capital allowances for the client as a result of that exercise. This utilised all of the AIA allowances of £1m which meant the company reduced their taxable profits by £1m on those costs and made a tax saving of £190k.
On the additional £1m over and above AIA limit, we were able to claim an annual writing down allowance of 18%, meaning an annual tax saving of £34k (based on current rates)
For any costs that did not qualify for capital allowances, we maximised their Structures and Buildings Allowance claim. From 29 October 2018, businesses have been able to claim the new Structures and Buildings Allowance (SBA) on qualifying construction costs. These costs do not qualify for capital allowances and would not previously have attracted any tax relief. The SBA provides a 3% write off per annum up to a maximum of 50 years.
If you are expecting to incur expenditure on plant and machinery or any assets mentioned above, Menzies can help you maximise your claim. Alternatively, if are you carrying out any refurbishment/fit out works we would be in a position to support you.
Menzies is a top 20 leading firm of accountants, finance and business advisors that operate out of a network of offices across Surrey, Hampshire and London, providing our clients with easy access and local knowledge. Described as the ‘best performing firm outside of the top 10’ by Accountancy Magazine, Menzies has over 400 employees and an annual turnover of more than £40m.