Mixed messages in Capital Allowances changes

The Annual Investment Allowance (AIA) allows any business whether within the charge to corporation tax (such as a limited company) or income tax (such as a sole trader or a partnership) to claim tax relief on 100 per cent of its qualifying expenditure if it does not exceed an annual limit.²

The ATT has repeatedly highlighted the problems created for business by having an AIA limit which could yo-yo up and down³ and result in a temporarily increased allowance actually resulting in a severe restriction in the allowance actually available.

The current £1,000,000 AIA limit was due to revert to £200,000 on 1 April 2023 which would have made the timing of capital expenditure very time critical for businesses whose accounting year ended after 31 March 2023. Today’s announcement of a permanent increase in the AIA limit to £1,000,000 will remove those complications and mean that qualifying expenditure within the annual limit of £1,000,000 will be fully tax-deductible. It will also provide certainty to businesses.

Senga Prior, Chair of the ATT’s Technical Steering Group, said:

“For the great majority of UK businesses⁴, the new permanent AIA level of £1,000,000 will significantly exceed their annual expenditure on plant and machinery, meaning they can claim full tax relief up front. It will also do away with the arithmetical complications which arose whenever the AIA limit reverted from a temporarily increased limit to its former permanent level of £200,000. In extreme cases, that could previously mean that a business’s actual annual limit was less than £17,000. We very much welcome the removal of that anomaly and the new stability in the AIA.

“For the UK’s largest businesses with very substantially higher levels of qualifying expenditure, it will be what was not announced today which will be most important. The previous Chancellor had signalled a radical overhaul of the capital allowances system⁵ which would take effect from 1 April 2023 to coincide with the ending of the temporary Super-Deduction on 31 March 2023. There is no indication in the Growth Plan 2022 that the Super-Deduction will continue⁶ but neither is there any indication that there will be any overhaul of the general capital allowance system. That means that capital expenditure in excess of the new permanent £1,000,000 AIA limit will have to be written off over a period of years. Under the Super-deduction, a company could write off an unlimited amount of qualifying expenditure in the year of purchase.

“Businesses seeking higher levels of relief on their capital expenditure may now wish to consider the investment incentive package which will become available in some 40 Enterprise Zones in England.⁷ We know that will include 100 per cent capital allowances on plant and machinery as well as significantly accelerated allowances on non-residential buildings and structures. We will, however, need to have more detail of these incentives including how they will operate and, importantly how they will also be available in Scotland, Wales and Northern Ireland.”   

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Notes for editors

1. The Chancellor announced this in today’s Fiscal Statement. Section 4.8 of the Growth Plan 2022 (HM treasury 23 September 2022) reads:

“4.8 Annual Investment Allowance – The government will support UK businesses by making the temporary £1 million level of the Annual Investment Allowance permanent, instead of letting it fall to £200,000 after 31 March 2023. This will support business investment, provide businesses with more stability, and make tax simpler for any business investing between £200,000 and £1 million in plant and machinery.”

2. The AIA enables a business to write off the whole of its qualifying expenditure on plant and machinery in the year of purchase rather than over a number of years. 

3. Between 2008 and 2022 there have been 7 different AIA limits with some decreases as well as some increases. For a more detailed explanation of the AIA and its associated problems, see: the Finance Bill 2021 ATT Representation on the subject.

4. A report by the Office of Tax Simplification in June 2018 concluded that the annual qualifying expenditure level of some 97% of UK businesses did not exceed the permanent AIA level of £200,000.

5. See: Potential Reforms to UK’s Capital Allowance Regime – Inviting views published 9 May 2022 by HM Treasury and ATT’s response.

6. Section 4.16 of the Growth Plan 2022 indicates that technical changes would be made to the Super-deduction legislation (required because of the scrapping of the increase of the Corporation Tax rate to 25%) to “ensure that the relief continues to operate as intended”. It was never intended that the relief would apply beyond 31 March 2023.

7. See: The Growth Plan 2022: Factsheet on Investment Zones (HM Treasury Policy paper of 23 September 2022)