Annual Investment Allowance extended to January 2022

The Annual Investment Allowance (“AIA”) has been kept at £1m for another year, taking us to the end of 2021.

AIA gives 100% tax relief in the first year for the cost of many types of capital expenditure. The AIA limit was due to return to £200,000 from 1 January 2021 but, in a bid to “stimulate investment in UK manufacturing”[1], has been kept at the higher £1m limit for a further 12 months.

Here are five things you should know.

  1. Most items of plant and machinery you are likely to buy will qualify for AIA. The key areas where AIA won’t apply are cars and most building work. However, that doesn’t mean tax relief isn’t available with ‘First Year Allowances’ (100% first year tax relief) available for new, fully electric cars and ‘Structures and Building Allowances’ available for new building work.

  2. If your accounting period straddles 31 December 2021, you will need to take care over when you make your purchase(s). The AIA will return to £200,000 from 1 January 2022 and the allowance will be apportioned based on your year end and a maximum post-1 January 2022 allowance will apply.

    For example, a 31 March 2022 year end would only have a maximum allowance of £50,000 for the 1 January – 31 March 2022 period so any significant capex should be ‘incurred’ (see below) by 31 December 2021 to avoid your tax relief being spread over a much longer period.

  3. Buying plant on deferred terms or with finance is generally the best thing to do to maximise your cashflow. However, it can affect when your tax relief is due. For example, an asset bought on hire purchase would need to be ‘brought into use’ by 31 December 2021 in order to benefit from the full £1m AIA.

    If you are buying significant items under a milestone, hire purchase or other financing mechanism, we recommend reviewing the tax treatment to ensure you can receive the accelerated tax relief.

  4. If your company is part of a group or connected with another company (e.g. through common shareholdings), the AIA limit may be shared between all the group/connected companies.

    For larger businesses, this means a global review is needed to avoid overclaiming the allowance.

  5. Not directly related to AIA but 100% First Year Allowances (“FYAs”) mentioned above have been extended to 31 March 2025 for new, fully electric cars. With more and more fully electric cars becoming available and a very low benefit in kind, that could be attractive.

Find out more

If you have any questions or would like to discuss how you can get a better understanding of your cash flow, please contact your local MHA member firm.

[1] https://www.gov.uk/government/news/government-extends-1-million-tax-break-to-stimulate-investment-in-uk-manufacturing