My previous blog discussed the introduction of the new Buildings Allowances. However, the 2018 budget also introduced some other changes, one of the most significant was the temporary increase in the Annual Investment Allowance (“AIA”) to £1,000,000 from 1 January 2019 for 2 years. For businesses with high capital expenditure, this allowance could have a positive impact on cashflow, enabling an immediate tax deduction for capital expenditure as opposed to receiving it over a number of years.
For businesses where their accounting period straddles 1 January 2019, the timing of the expenditure will be crucial. There will be a pro-rata calculation required to work out the limit but in addition to this it is vital that businesses are aware that the amount of AIA claimed in the period to 31 December 2018 cannot exceed £200,000 (the maximum amount before the increase in the limit to £1,000,000).
For example, the total AIA available to a business with a June 2019 year end is £600,000. Assuming it incurred £600,000 of CAPEX in the period to 31 December 2018, the maximum AIA that can be claimed is only £200,000. However, if this was split £200,000 in the period to 31 December 2018 and £400,000 in the period to 30 June 2019, AIA could be claimed on the entire expenditure having a significant impact on cashflow.
Due to this restriction on claiming AIA in the period to 31 December 2018, it is imperative that businesses intending to incur significant capital expenditure consider the timing of their expenditure to avoid missing out on using the higher level of AIA.
In our final blog on the changes to Capital allowances, I will look at the other changes to Capital Allowance announced in the budget.
For more information contact Lesley Connon, Corporate Tax Senior Manager (email@example.com) or your usual AAB contact.