Unincorporated businesses and companies planning capital expenditure projects need to be aware of some time-limited reliefs. Timing capital expenditure to benefit from these reliefs can be financially beneficial.
The annual investment allowance (AIA) is available to both unincorporated business and to companies. It provides immediate 100% relief against profits for qualifying capital expenditure on plant and machinery in the accounting period in which the expenditure is incurred up to the available AIA limit. The limit remains at its temporary limit of £1 million until 31 March 2023, reverting to its permanent level of £200,000 from 1 April 2023.
Most items of plant and machinery qualify for the AIA; the main exception being expenditure on cars.
Where the accounting period is 12 months in length and falls wholly within the period from 1 January 2019 to 31 March 2023, the AIA limit for the period is £1 million.
Where the period spans 31 March 2023, the AIA limit for the period is:
x/12 x £1 million + y/12 x £200,000,
where x is the number of months in the period prior to 1 April 2023 and y is the number of months in that period on or after that date.
Consequently, the AIA limit for the year to 30 September 2023 is £600,000 (6/12 x £1 million + 6/12 x £200,000).
However, not all expenditure in a period spanning 31 March 2023 is equal. Where the expenditure is incurred before 1 April 2023, qualifying expenditure up to the limit for the period will be eligible for the AIA. However, a further cap applies if the expenditure is incurred in the period but after 31 March 2023. This is y/12 x £200,000. Only expenditure up to this cap qualifies for the AIA. Relief for expenditure in excess of that qualifying for the AIA is given as writing down allowances.
So, if a business prepares accounts for the year to 30 September 2023, its AIA limit for the year is £600,000. It can claim the AIA for expenditure of up to £600,000 if the expenditure is incurred before 1 April 2023. However, if it incurs the expenditure after 1 April 2023, only £100,000 qualifies for the AIA, whereas, if the business accelerates the expenditure to incur it on or before 30 September 2022 (so that it falls within the year to 30 September 2022), it can benefit from the AIA for expenditure of up to £1 million.
Where significant capital projects are planned, undertaking them sooner rather than later will mean maximum advantage can be taken of the temporary AIA limit.
Companies can also benefit from a super-deduction of 130% of the expenditure when calculating profits. This is available in respect of qualifying expenditure on plant and machinery which would otherwise be eligible for main rate writing down allowance, subject to certain exceptions, the main one being expenditure on cars.
To qualify, the expenditure must be incurred in the period from 1 April 2021 to 31 March 2023.
The super-deduction is only available to companies; unincorporated businesses do not qualify. Where available, the deduction rate trumps that under the AIA. However, the expenditure must be incurred by 31 March 2023 to qualify.
Companies can also benefit from a 50% first-year allowance for qualifying expenditure (excluding cars) that would otherwise benefit from special rate writing down allowances.
This allowance can be useful if the AIA limit has been used up. Again, the expenditure must be incurred by 31 March 2023.
Partner note: CAA 2001, s. 51A; FA 2021, s. 9.