In welcoming the Chancellor’s announcement of an extension of the temporary increase in the Annual Investment Allowance (AIA) to 31 March 2023,1 the Association of Taxation Technicians (ATT) has identified an opportunity to simplify the transitional rules in order to help smaller businesses.
The extension to 31 March 2023 of the period in which businesses can obtain full tax relief on a higher level of qualifying capital expenditure is good news for businesses whose annual capital spending exceeds £200,000, particularly if their profits are charged to income tax rather than corporation tax.2
However, the ATT notes, extending the date for the ending of the temporary £1 million AIA from 31 December 2021 to 31 March 2023 will do nothing to resolve the confusing transitional provisions which mean that a business which incurs qualifying expenditure on or after that 1 April 2023 but in an accounting year which straddles 31 March 2023 could have an effective AIA limit of as little as £16,667.3
Jon Stride, Co-chair of ATT’s Technical Steering Group, said:
“The ATT has consistently pointed out the nonsense of legislation designed to provide a significant but temporary increase in the AIA actually producing a severe reduction from the normal annual limit of £200,000. That situation has previously been of greatest relevance to businesses with accounting year ends early in the calendar year. Moving the end of the temporarily increased AIA to 31 March 2023 means that the situation will have greatest impact on businesses with an accounting year ending early in the 2023/24 tax year – for example 30 April 2023.
“We have previously urged the Government to amend the transitional rules so that they automatically ensure that a business has an AIA entitlement in a transitional accounting year of no less than the normal AIA limit of £200,000 regardless of when within that year they incurred the qualifying expenditure within that year.4
“Over 95 per cent of UK businesses incur qualifying capital expenditure of less than £200,000 each year.5 The temporary AIA limit of £1 million could never benefit these businesses – but the transition back from £1 million to £200,000 in 2023 could actively disadvantage them. Our solution would ensure that this did not happen. We hope that the Government will take the opportunity in the forthcoming Finance Bill to introduce the simplification measure which we are advocating.”
Notes for editors
1. Policy Paper related to the announcement is here. It includes an indication that “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” but it is unclear whether these will address the issue highlighted in this press release.
2. Many of the businesses whose profits are charged to corporation tax are likely to be insulated from the impact of the transitional provisions following the introduction of the Super Deduction from 1 April 2021.
3. A business with an accounting date of 30 April 2023 would have an AIA entitlement of £933,334 if it incurred all of its relevant qualifying capital expenditure by 31 March 2023 but only £16,667 if it incurred all that expenditure in the final month of its accounting year.
4. For full details of ATT’s proposed solution to the issue, see our Budget Representation on the subject here.
5. A report by the Office of Tax Simplification in June 2018 noted that only about 30,000 businesses incur more AIA qualifying expenditure than the permanent AIA limit of £200,000 whilst the other 1.2 million businesses spend less than the AIA limit.