Insights

The Annual Investment Allowance (AIA) allows businesses to offset the cost of eligible plant and machinery purchases to reduce taxable profits. Currently the annual limit is £1 million, but it will be reducing to £200,000 from 1 April 2023.

This change may prove significant for some business owners, especially if their accounting period for claiming the tax relief straddles this changeover date, because it will reduce the amount of AIA they can claim for the year. Businesses with a 5 April year-end should take extra care to avoid being treated as having incurred qualifying expenditure in any of the five days at the beginning of April 2023.

Assuming that there will not be an extension of the temporarily increased AIA beyond 31 March 2023 and that the standard level of AIA will be reintroduced, businesses whose year end is not 31 March and who need to make a claim for AIA, will need to account for the reduction. The basis period to be reviewed is known as the second straddling period.

For incorporated businesses, the 31 March 2023 transition date coincides with three developments - the scheduled end-date for the 130% super deduction, the scheduled end-date for the 50% special rate allowance, and the forthcoming introduction from 1 April 2023 of the 25% corporation tax rate.

For unincorporated businesses, the 31 March 2023 date reduces the complexity of calculating taxable income for 2023/24 in relation to transitional rules for basis periods. For instance, depending on where the business year-end falls, reverting to the standard £200,000 AIA limit from 1 April 2023 means that the more months in the period after 31 March 2023 (the second straddling period), the lower the overall AIA limit for that whole accounting year.

For both incorporated and unincorporated businesses, the tax relief benefits of qualifying expenditure incurred before this date are higher, although of course for incorporated businesses, the increase in the rate of corporation tax means relief, although lower, is given at a higher rate of tax.

Incorporated businesses will need to take into account their straddling periods, which will differ from business to business and will affect the best times in which to incur expenditure.

If you would like some advice on capital allowances, please get in touch by emailing partners@rjp.co.uk.