Welcome extension to the annual investment allowance - but scope for further improvement

The extension of the temporary £1,000,000 AIA limit that is currently in place by a further year to 31 December 2021 means that businesses that incur significant amounts of capital expenditure on plant and machinery by that date will get tax relief on the cost much earlier than if the purchase is made after that date.³

But for businesses with lower levels of qualifying expenditure, the standard limit of £200,000 is often sufficient and the temporary increase creates no benefit at all. In fact, it creates an unwelcome complication which makes the timing of expenditure very sensitive. Incurring expenditure shortly after the ending of the £1,000,000 AIA limit can mean that the effective limit for tax relief becomes very substantially less than even the standard £200,000 limit.⁴

The ATT is calling for HMRC to take the opportunity to ensure that the same anomalous arithmetical complications do not arise when the newly extended temporary increase ends on 31 December 2021.  

Jeremy Coker, President of the ATT, said:

“The extension in the temporary increase in AIA will be very welcome for businesses with higher levels of qualifying capital expenditure. However, for the many businesses whose relevant annual expenditure is no more than £200,000, it will simply delay by one year an unwelcome complication which would otherwise have arisen on 31 December 2020.

“We have made the case repeatedly for a modification to the tax legislation so that businesses which are unlikely to benefit from any temporary increase in the AIA can avoid having to plan the timing of their expenditure precisely or risk having their tax relief delayed.⁵

“We are urging the government to consider how the legislation might be amended so that the AIA does not produce counter intuitive results for businesses with lower levels of expenditure. We have previously suggested two alternative approaches⁶. The first and simpler way would be to permit businesses to opt out of entitlement to the £1,000,000 and just rely on the standard £200,000 limit. The other approach would be to introduce an automatic base level of AIA of £200,000 for the whole of the accounting year of a business in which 31 December 2021 fell.⁷ Either approach would achieve the same outcome and avoid the present anomaly of an increased AIA potentially resulting in an effective annual limit of substantially less than £200,000 in the year of change.”

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Notes for editors

1. See: HM Treasury release of 12 November 2020

2. ATT’s press release of 4 September 2020 outlined the complications which arise for businesses (unless they have a 31 December year-end) when the temporary increase in the AIA limit ends. The extension of the increased limit for a year will simply delay the particular complications.

3. ATT’s press release of 28 October 2020 explained the timing differences in tax relief which the temporary increase in the AIA can create. The same principles will apply following the extension of the increased AIA limit until 31 December but the impact will be moved on a year.

4. Please see our press release of 4 September 2020 (link in Note 2 above).

5. See for example ATT’s Written Evidence to the House of Commons Public Bill Committee of 21 November 2018.

6. See section C of our Written Evidence (see Note 5 above).

7. A business with a 31 December year-end does not have the problem which other businesses have as the temporary increase in AIA applies on a calendar year basis. For businesses with any other year-end, the change in the AIA limit occurs part way through an accounting year and that requires the periods before and after the change in limit to be considered separately.