In advance of the Autumn Budget, the Association of Taxation Technicians (ATT) is calling upon the Chancellor to extend the availability of the temporary increase in the Annual Investment Allowance (AIA) beyond its scheduled end date of 31 December 2020 in order to help recovering businesses.
The AIA allows businesses to offset fully the cost of qualifying capital items of plant and machinery against taxable profits. The AIA limit is set at annual expenditure of £200,000 but that limit was increased temporarily to £1,000,000 for the two calendar years 2019 and 2020 ‘in order to stimulate business investment in the economy by providing an increased incentive for businesses to invest in plant or machinery’.1
Jeremy Coker, President of the ATT, said:
“COVID-19 means that 2020 has been a year like no other and for businesses the uncertainties mean that few have been in a position to make use of the increased AIA in the way that they might otherwise have done. Threats to their very existence from temporary closures, loss of sales, shortage of supplies and pressure on finances means that businesses of all sizes have deferred purchases of plant or machinery unless absolutely essential. We very much hope that the Chancellor is planning to announce an extension of the temporary £1,000,000 limit until 31 December 2021 at the earliest.”
For any business whose financial year ends on 31 December 2020, the return to the £200,000 limit would mean that it could benefit from AIA on total expenditure of up to £1,000,000 incurred at any time in the year to 31 December 2020 but then only £200,000 in the whole of 2021. For any business with a financial year end other than 31 December, the scheduled ending of the temporary increase on 31 December 2020 could have an even more odd effect.
Take a business with the common year end of 31 March. The complex way the arithmetic works where there is a change in the AIA limit means, that the business could benefit from an effective £800,000 limit if it incurred qualifying expenditure at any time in the nine-month period to 31 December 2020. But the AIA limit for its total expenditure in the three-month period between 1 January 2021 and 31 March 2021 would plummet to £50,000. That would apply even if the business had made no use of the £800,000 limit in the previous nine months.2
Jeremy Coker said:
“It would not be very helpful if the incentive to invest in plant and machinery evaporated on the stroke of midnight on 31 December 2020 just when businesses were hopefully beginning to see signs of recovery in 2021 which would provide the necessary confidence to make such investment.
“I know there are many reasons for the Chancellor to already be thinking of his next Budget but it would be helpful to businesses if he were to indicate in advance of Budget Day whether or not the temporary increase will continue beyond 31 December 2020.”
Notes for editors
- See HMRC Policy Paper Temporary increase in the Annual Investment Allowance of 29 October 2018.
- For a more detailed explanation of the workings of the AIA, see the ATT’s Written Evidence to the House of Commons Public Bill Committee of 21 November 2018.