On 1 January 2019 the two-year window opened on the increase in the Annual Investment Allowance (AIA) to £1 million for qualifying expenditure on plant and machinery and integral features. This will be an added incentive and beneficial to those in the agricultural community who are planning capital expenditure in the next couple of years to either consolidate their existing business or for those looking to diversify.
Assuming the full allowance is used over the two-year period, the tax saving can be as much as £380,000 for a limited company or £900,000 for a sole trader or partnership.
There are, however, a number of considerations and potential pitfalls to bear in mind when looking to use the allowance:
- The allowance runs over the calendar year and is therefore only available on a pro rata basis if the business accounts cover a different period. Those with an imminent March 2019 year end therefore will only initially benefit from three months of the allowance, which is added to nine months of the previous allowance of £200,000. Expenditure outside the opening and closing window may therefore miss out on the higher relief.
- Businesses can time their capital expenditure to ensure that they can maximise the allowances available. However, they should be aware that there are rules in place to guard against artificially bringing forward expenditure to fall within the time limits and care is therefore needed that any claims comply with the legislation. Expenditure is generally deemed to have been incurred on date of delivery rather than on date of order.
- There can also be restrictions on assets subject to hire purchase agreements. Allowances are available on these assets when they are brought into use rather than on delivery.
- Not all businesses are eligible for the AIA, for example trusts and mixed partnerships (those with a corporate or trust partner) are ineligible.
- The AIA is not just available on plant and machinery but also on fixtures and fittings on eligible buildings and structures (but generally excluding residential properties). The rate of relief for fixtures is normally at a lower rate compared with plant and machinery.
- The AIA is an accelerated relief on capital allowances and any claims can deplete the pool of allowances available in future periods. This can lead to sizeable balancing charges arising in future periods when assets are sold.
Mike Jones, a Senior Manager and a member of Saffery Champness’ Landed Estates Group, comments:
“There are some real opportunities to utilise this generous relief from government, which is designed to stimulate spending in this current uncertain climate, but people need to be aware that the devil is in the detail and professional advice should be sought.”