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This publication is available at https://www.gov.uk/government/publications/temporary-increase-in-the-annual-investment-allowance/temporary-increase-in-the-annual-investment-allowance
Who is likely to be affected
Businesses investing more than £200,000 in plant and machinery from January 2019.
General description of the measure
This measure will provide significantly faster tax relief for plant and machinery investments between £200,000 and £1 million, helping businesses to invest and grow.
This measure is designed to stimulate business investment in the economy by providing an increased incentive for businesses to invest in plant or machinery.
Background to the measure
The maximum amount of the Annual Investment Allowance (AIA) was temporarily increased to £500,000 at Budget 2014. Summer Budget 2015 set the rate of AIA permanently to £200,000 from 1 January 2016. This measure increases the amount of the AIA to £1,000,000 from January 2019.
The measure will have effect in relation to qualifying expenditure incurred from 1 January 2019.
Since 1 April 2008 (Corporation Tax) and 6 April 2008 (Income Tax) most businesses, regardless of size, have been able to claim the AIA on their expenditure on plant or machinery, up to a specified annual amount each year (subject to certain conditions mentioned below). Summer Budget 2015 set the permanent limit of AIA to £200,000 from 1 January 2016.
Businesses are able to claim the AIA in respect of their expenditure on both main rate and ‘special rate’ plant and machinery. There are however certain exceptions, set out in section 38B of the Capital Allowances Act 2001 (CAA), the main exception being expenditure on cars.
The AIA is a 100 per cent upfront allowance that applies to qualifying expenditure up to a specified annual limit or cap. Where businesses spend more than the annual limit, any additional qualifying expenditure will attract relief under the normal capital allowances regime, entering either the main rate or the special rate pool, where it will attract writing-down allowances at the main rate or special rate respectively.
Legislation will be introduced in Finance Bill 2018 to temporarily increase the AIA limit to £1,000,000 from 1 January 2019 for 2 years.
Where a business has a chargeable period that spans either of:
i. the operative date of the increase to £1,000,000 on 1 January 2019, or
ii. the operative date of the reversion to £200,000 on 1 January 2021, transitional rules will apply.
(i) Chargeable periods spanning date of increase to £1,000,000
Where a business has a chargeable period that spans 1 January 2019, the maximum allowance for that business’s transitional chargeable period comprises 2 parts:
a) the AIA entitlement, based on the £200,000 cap for the portion of the period falling before 1 January 2019
b) the AIA entitlement, based on the temporary £1,000,000 annual cap for the portion of the period falling on or after 1 January 2019
The business’s maximum AIA for this transitional chargeable period would therefore be the total of (a) + (b).
Where a business has a chargeable period from 1 July 2018 to 30 June 2019 the maximum AIA for this period would be £600,000 calculated as follows:
a) the proportion of the period from 1 July 2018 to 31 December 2018, that is, 6/12 x £200,000 = £100,000 and
b) the proportion of the period from 1 January 2019 to 30 June 2019, that is 6/12 x £1,000,000 = £500,000
£100,000 + £500,000 = £600,000.
However, in relation to (a) (the part period falling before 1 January 2019, no more than a maximum of £200,000 of the company’s actual expenditure in that particular part period would be covered by its transitional AIA entitlement (the maximum claimable before the increase to £500,000).
(ii) Chargeable periods spanning date of reversion to £200,000
Where a business has a chargeable period that spans the date of the end of the temporary increase on 31 December 2020, the maximum allowance for that business’s transitional chargeable period comprises 2 parts:
a) the AIA entitlement, based on the temporary £1,000,000 annual cap for the portion of the period falling before 1 January 2021, and
b) the AIA entitlement, based on the £200,000 cap for the portion of the period falling on or after 1 January 2021
A company with a 12 month chargeable period from 1 April 2020 to 31 March 2021 would calculate its maximum AIA entitlement based on:
a) the proportion of the period from 1 April 2020 to 31 December 2020, that is, 9/12 x £1,000,000 = £750,000; and b) the proportion of the period from 1 January 2021 to 31 March 2021, that is 3/12 x £200,000 = £50,000
The company’s maximum AIA for this transitional chargeable period would therefore be the total of (a) + (b) = £750,000 + £50,000 = £800,000.
However, in relation to (b) (the part period falling on or after 1 January 2021) no more than £50,000 of the business’s actual expenditure in that part period would be covered by its transitional AIA entitlement.
There are more detailed transitional rules for businesses subject to IT and with a chargeable period spanning the date of the increase of the AIA limit.
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)
|2018 to 2019||2019 to 2020||2020 to 2021||2021 to 2022||2022 to 2023||2023 to 2014|
These figures are set out in Table 2.1 of Budget 2018 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Budget 2018.
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.
Impact on individuals, households and families
Capital allowances can only be claimed in the course of a business.
This measure does not impact on equality of groups sharing protected characteristics.
Impact on business including civil society organisations
Businesses, investing in qualifying plant and machinery, will benefit from the temporary increase. It increases the net present value of capital allowances to investors in plant or machinery and provides a cash flow benefit, likely to be of most help to large and medium-sized businesses spending up to the current £200,000 threshold.
The temporary increase in the allowance to £1,000,000 is not expected to result in any material compliance costs for businesses.
The impacts on businesses’ on-going administrative burdens are also expected to be negligible as most of the businesses affected are likely to still need to calculate some capital allowances on a year-by-year basis for previously pooled expenditure and/or new expenditure not qualifying for the temporary £1,000,000 AIA.
This measure is not expected to have a material impact on civil society organisations.
Small and micro business assessment: the temporary increase in the AIA is expected to be of benefit to the largest small and micro businesses and smallest large businesses who regularly exceed their first year allowances claims, but have significant capital expenditure which would otherwise be relieved at 18 percent.
Operational impact (£m) (HMRC or other)
Changes will be needed to HMRC IT systems for this measure and the costs are estimated to be £440,000.
Environmental impacts: the temporary increase in the AIA will be of benefit to businesses who previously purchased items from the energy-saving and environmentally-beneficial lists which were eligible for first-year allowances which is due to end in 2020.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax returns and through regular engagement with businesses and their representative bodies.
If you have any questions about this change, contact Tunde Ojetola on Telephone: 03000 585 916 or email: email@example.com.