Policy paper

Annual Investment Allowance extension

Published 27 October 2021

Who is likely to be affected

Businesses investing more than £200,000 in plant and machinery from January 2022.

General description of the measure

This measure will temporarily increase the limit of the annual investment allowance (AIA) from £200,000 to £1,000,000 for qualifying expenditure on plant and machinery incurred during the period from 1 January 2022 to 31 March 2023.

Policy objective

This measure is intended to have positive outcomes for businesses by supporting and encouraging business investment, particularly those ineligible for the super-deduction, and by simplifying the tax relief for such investment.

Background to the measure

Summer Budget 2015 set the permanent level of AIA at £200,000 from 1 January 2016. At Budget 2018, the level was temporarily increased to £1,000,000 for two years from 1 January 2019. At Legislation Day 2, in November 2020, this was extended by a further year.

The super-deduction and an accompanying special rate allowance were introduced at Spring Budget 2021, temporarily providing enhanced rates of relief for qualifying expenditure up to 31 March 2023, incurred by companies chargeable to UK corporation tax, on certain plant and machinery assets.

Detailed proposal

Operative date

This measure will have effect in relation to AIA qualifying expenditure from 1 January 2022.

Current law

The AIA was introduced from April 2008, which most businesses, regardless of their size and subject to certain conditions (specified below), can claim on their qualifying expenditure for plant and machinery. Its permanent limit was set at £200,000 from 1 January 2016.

The AIA is a 100% capital allowance for qualifying expenditure on plant and machinery up to a specified annual limit. The capital allowances legislation in respect of AIA is at sections 38A, 38B, and 51A-51N of Capital Allowances Act 2001 (CAA).

Businesses claim the AIA in respect of expenditure which would otherwise be eligible for writing down allowances (WDAs). Given at either the main or special rates, WDAs provide relief for eligible capital expenditure over a number of tax periods. The AIA therefore accelerates relief, typically simplifying processes for businesses and aiding their cashflow.

AIA is not available for all capital expenditure on plant and machinery, such as expenditure on cars. Further details on the categories of capital plant and machinery expenditure that do not qualify for AIA are set out in section 38B of CAA.

Proposed revisions

Legislation will be introduced in the Autumn Finance Bill 2021-22 to maintain the current temporary £1,000,000 AIA limit for one year and three months from 1 January 2022, which will align the end of the temporary AIA limit with the end of the super-deduction.

Transitional rules will apply where a business has a tax period that spans the operative date of 1 April 2023 for the reversion of the AIA limit to £200,000. Under such rules, the maximum AIA available should be calculated in two parts, with apportionments made on a just and reasonable basis.

1. The AIA available based upon the £1,000,000 temporary limit for the proportion of the tax period falling before 1 April 2023.

2. The AIA available based upon the £200,000 limit for the proportion of the tax period falling on or after 1 April 2023.

Example

Based only on these transitional rules and apportioning by reference to the number of months, the maximum AIA available to a company with a 12-month tax period from 1 January to 31 December 2023 would be £400,000, which is calculated as follows.

1) The period from 1 January to 31 March 2023: £1,000,000 x 3/12 months = £250,000

and

2) The period from 1 April to 31 December 2023: £200,000 x 9/12 months = £150,000

The maximum entitlement is also affected by when the qualifying expenditure is incurred. In this example, if the total qualifying expenditure for that tax period amounts to £500,000 and is incurred by 31 March 2023, then the amount eligible for AIA is limited to £400,000. If it was incurred after that date, then it is limited to £150,000.

There are more detailed transitional rules for businesses subject to income tax and with a tax period spanning the date of the decrease of the AIA limit on 1 April 2023.

There are also more detailed transitional rules about entitlement to AIA for example, in relation to group companies, or when businesses under common control are regarded as “related”.

These transitional rules are based on similar time-apportionment principles as applied to the rules in section 51K of CAA (operation of the annual investment allowance where restrictions apply).

Summary of impacts

Exchequer impact (£m)

2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027
-65	-240	-165	+115	+60	+50

These figures are set out in Table 5.1 of Autumn Budget 2021 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2021.

Economic impact

By accelerating the relief on qualifying expenditure up to £1,000,000 limit, this measure will provide an incentive for those businesses already spending up to the £200,000 threshold to increase or bring forward their capital expenditure on plant and machinery.

The terms used in this section are defined in line with the Office for Budget Responsibility’s indirect effects process. This will apply where, for example, a measure affects inflation or growth. You can request further details regarding this measure at the email address listed below.

Impact on individuals, households and families

The measure is not expected to impact on individuals as it only affects businesses investing more than £200,000 in plant and machinery from January 2022. This measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not anticipated that there will be impacts for those in groups sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on an estimated 31,000 businesses by making available an increased level of relief for expenditure on plant and machinery at 100% of the cost for the tax period in which it was incurred.

One-off costs will include businesses having to familiarise themselves with the change and could include updating software as a result of the change. There are not expected to be any continuing costs.

Continuing savings could include businesses not having to calculate relief available through WDAs in future tax periods against the purchase costs of their plant and machinery covered by the increased amount of AIA available.

Small and micro business (SMB) assessment: the temporary increase in the AIA is expected to benefit the largest SMBs whose investments in plant and machinery regularly exceed the permanent £200,000 AIA limit. Without this change these businesses could only relieve their relevant capital expenditure through WDAs at a lesser rate.

Customer experience could see an improvement as calculating capital allowances for plant and machinery purchases will be simpler.

This measure is not expected to impact on civil society organisations.

Operational impact (£m) (HMRC or other)

This measure will require changes to HMRC IT systems and guidance, the costs are estimated to be £770,000.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected of claims for the AIA in tax returns and through engagement with businesses and their representative bodies.

Further advice

If you have any questions about this change, contact HMRC on e-mail: contact.capitalallowances@hmrc.gov.uk.