How to take advantage of the £2 million AIA tax relief

A big(ish) boost for business owners was unveiled in the 2018 Budget, when the Chancellor announced that there would be a large increase to the annual investment allowance (AIA).

Historically, AIA has been increased temporarily to help invigorate investment spending, especially for small to medium sized businesses. In 2014, AIA was increased to £500,000 before it dropped back down to £200,000, where it has remained until now.  Starting from 1 January 2019, AIA will rise from the current £200,000 to £1 million, for a period of two years.

Could the AIA increase trigger more investment?

Having this level of tax relief available to apply in full during a single financial period can make a big difference to a business needing to upgrade certain assets. It allows the full value of qualifying plant and machinery to be deducted from profits before incurring corporation tax. It also means that the business can potentially benefit from new capital equipment costing up to £2 million over the two-year availability period, provided the timings of investments are properly planned.

Given that many companies have reported they are holding off on their capital expenditure due to the uncertainty created by Brexit, this policy could help to provide some motivation for investing in new and potentially productivity enhancing technology in a cost-effective way. Although all companies can take advantage of the new rules, small and medium sized food and drinks businesses, a highly active sector currently in the UK, are tipped to benefit heavily, together with printing companies and farmers.

How to maximise AIA tax relief

In order to obtain the maximum tax relief, especially if plans involve spending up to the maximum £2 million over the two-year period, companies should be planning to start making their investments sooner rather than later. The current period before the Christmas and New Year holidays could be an ideal time to be evaluating prospective plant and machinery equipment to purchase, with a view to a transaction being finalised and first payments being made in January, to benefit from the full 24 months of AIA tax relief.

When does the tax relief start?

The tax relief will become effective on the date of expenditure and for capital allowance purposes, this is the date when the cost was incurred i.e. when the obligation to pay for an asset becomes unconditional. In most instances, this is the date goods are delivered, but for some items, e.g. where an asset is built to order, e.g. for construction projects, it will be the date the project or asset’s certification is signed or when each stage of the work is certified as completed.

Some goods will be delivered before the obligation to pay becomes due. If payment is required (or made) more than four months after delivery, then the expenditure is not treated as being incurred until payment is made, therefore pushing the deemed date of acquisition back to a later date. This is well worth knowing for AIA qualification purposes.

Care should always be taken to ensure that a contract entered into with a supplier in order to apply the maximum annual investment allowance doesn’t fall foul of anti-avoidance legislation e.g. by artificially creating an obligation for payment prior to delivery.

There is anti-avoidance legislation to prevent manipulation of the date that capital allowances can be claimed; you can be sure that HMRC use this to police capital allowance claims in periods when there is a change in the AIA.

Qualifying conditions for AIA to apply

Other qualifying conditions apply when considering how new assets will be financed, as the purchaser must have legal ownership of the asset in order to be able to qualify for capital allowances and claim the AIA. This means the items must either be purchased outright, or leased through a contract whereby the purchaser owns the items outright at the end of the purchase agreement e.g. hire purchase. If the item is acquired under a finance lease and the purchaser does not own the item outright at the end of the contract, capital allowances cannot be claimed.

Next steps

Please contact us directly if you are thinking about using the annual investment allowance and would like to discuss the matter further.