Friday, October 1, 2021

Capital allowances

End of AIA transitional limit

The Annual Investment Allowance (AIA) provides a deduction of 100% of the expenditure in the period in which it was incurred, up to the level of the available AIA limit. The AIA limit was increased from its permanent level of £200,000 to £1 million for a temporary period of three years, from 1 January 2019 to 31 December 2021. The limit reverts to £200,000 from 1 January 2022.

If you are planning capital expenditure in excess of £200,000, if funds permit, you may wish to incur the expenditure before 31 December 2021 to take advantage of the higher AIA limit.

It should be noted that transitional provisions apply where the accounting period spans 31 December 2021 – the AIA limit for the period reflects the proportion falling before 1 January 2022 for which the limit is £1,000,000 and the proportion falling after this date, for which the limit is £200,000. However, there is a trap in that an additional cap applies to limit the amount for which the AIA can be claimed in respect of expenditure incurred on or after 1 January 2022. This means that relief may not be available in full for post-31 December 2021 expenditure, even if the expenditure is less than the total AIA limit for the accounting period.

Super-deduction and new first-year allowance

Companies are able to benefit from two additional first-year allowances for qualifying expenditure incurred in the period from 1 April 2021 to 31 March 2023.

The first is a super-deduction available for most expenditure that would otherwise benefit from main rate writing down allowances at the rate of 18%, although cars are excluded. Where the expenditure qualifies for the super-deduction, the first-year allowance is given at the rate of 130% of the qualifying expenditure. A balancing charge may apply on the disposal of the asset.

Where available, the super-deduction is advantageous and will provide a better rate of relief than that given by the AIA.

The second temporary allowance is a 50% first-year allowance for qualifying expenditure that would otherwise qualify for a writing down allowance at the special rate of 6%. The first-year allowance is given at the rate of 50% of the qualifying expenditure. It is not available for expenditure on cars. As with the super-deduction, a balancing charge may apply on the disposal of the asset.