Policy paper

Temporary increase in annual investment allowance for plant and machinery

Published 3 March 2021

Who is likely to be affected

Businesses investing more than £200,000 in plant and machinery from January 2021.

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 expenditure on plant and machinery incurred during the period from 1 January to 31 December 2021.

Policy objective

This measure is designed to stimulate investment in the economy by providing an increased incentive to invest in plant and machinery and to simplify the tax relief for this.

Background to the measure

The 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 2 years from 1 January 2019.

Detailed proposal

Operative date

The measure will have effect in relation to qualifying expenditure from 1 January 2021.

Current law

AIA was introduced from April 2008 and most businesses regardless of their size and subject to certain conditions (specified below), have been able to claim this on their expenditure on plant and machinery. The permanent limit of the annual amount 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 Capital Allowances Act 2001 (CAA).

Most businesses are able to claim the AIA in respect of their expenditure on plant and machinery which would otherwise be eligible for another type of capital allowance known as a writing down allowance (WDA) at either the main or special rates, which defer relief for most of the expenditure to future tax periods.

AIA is not available for certain capital expenditure on plant and machinery and the exceptions are set out in Section 38B CAA, the main one being expenditure on cars.

Proposed revisions

Legislation will be introduced in Finance Bill 2021 to maintain the current temporary £1,000,000 AIA limit for one year from 1 January 2021.

Transitional rules will apply where a business has a tax period that spans the operative date of 1 January 2022 for the reversion of the AIA limit to £200,000. Under such rules, the maximum AIA available should be calculated in 2 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 January 2022.
2. The AIA available based upon the £200,000 limit for the proportion of the tax period falling on or after 1 January 2022.

Example

Based only on these transitional rules and apportioning by reference to the number of days, the maximum AIA available to a company with a 12-month tax period from 1 April 2021 to 31 March 2022 would be £802,740, which is calculated as follows:

1. The period from 1 April to 31 December 2021: £1,000,000 x 275/365 days = £753,425 and
2. The period from 1 January to 31 March 2022: £200,000 x 90/365 days = £49,315

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 £900,000 and is incurred by 31 December 2021, then the amount eligible for AIA is limited to £802,740. If it was incurred after that date, then it is limited to £49,315.

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 January 2022.

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

2020 to 2021	2021 to 2022	2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026
-120	-395	-80	+110	+60	+50

These figures are set out in Table 1.1: Policy decisions since Budget 2020 and have been certified by the Office for Budget Responsibility. More details can be found in the Policy costings: November 2020 document published alongside Spending Review 2020.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure is not expected to impact on individuals as it only affects businesses investing more than £200,000 in plant and machinery from January 2021. 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 will impact on an estimated 31,500 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.

The administrative burden is likely to be minimal as they will simply be eligible to claim a larger amount of their qualifying expenditure under AIA. One-off costs could include businesses having to make themselves aware of the change and 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. This measure is not expected to impact civil society organisations.

Small and micro business (SMB) assessment: the temporary increase in the AIA is expected to be of benefit to the largest SMBs with investment in plant and machinery which regularly exceeds the permanent £200,000 AIA limit, which would otherwise be relieved by WDAs at a lesser rate.

Customer experience impact: this measure is expected overall to improve businesses’ and individuals’ experience of dealing with HMRC as calculating capital allowances for their plant and machinery purchases will be simpler.

Operational impact (£m) (HMRC or other)

This measure will require changes to HMRC IT systems and guidance, the costs are estimated to be £800,000.

Other impacts

Environmental Impacts: the continuation of the temporary increase in the AIA will be of benefit to businesses which previously purchased items from the energy-saving and environmentally-beneficial technology lists which were eligible for first-year allowances which came to an end in April 2020.

Other impacts have been considered and none has been identified.

Monitoring and evaluation

The measure will be monitored through information collected from tax returns and through engagement with businesses and their representative bodies.

Further advice

If you have any questions about this change, please contact John Rodgers on Telephone: 03000 514188 or email: john.p.rodgers@hmrc.gov.uk.