Annual Investment Allowance limit extended until 1 January 2022

The Annual Investment Allowance (AIA) was temporarily increased to £1m for a two-year period and was due to end on 31 December 2020. However, the Treasury has announced that this will be extended by a further year, until 1 January 2022.

The AIA allows engineering and manufacturing businesses to obtain 100% tax relief on qualifying capital expenditure such as plant, machinery, vans and tools, up to £1m in the year of purchase. The extension is hoped to stimulate investment in UK manufacturing and support business confidence as companies look to weather the pandemic and plan for the future.

Partner and Head of EQ Engineering & Manufacturing, Ross Oliphant, commented, “This welcome extension of the AIA limit takes away the time pressure to spend funds on capital expenditure prior to 31 December 2020 and allows the planning of capital expenditure to continue into 2021 without the threat of reduced allowances and perhaps, when pressure on cashflow is less. Effective tax planning now for next year will help avoid the potential trap when the limit reduces and provides a great opportunity for engineering and manufacturing businesses to invest in essential assets that are critical to the operation of their business. Utilising the temporary increase will not only provide significant tax reliefs but should encourage greater productivity and growth within the sector.”

When considering a large-scale capital expenditure, the timing of the expenditure, as well as the amount, is critical. The transitional provisions for periods straddling 31 December 2021 can operate harshly, meaning delayed expenditure from 2021 to 2022 can significantly delay the time at which relief is obtained for that expenditure. These provisions introduce a cap on expenditure incurred in the period falling on or after 1 January 2022, once the AIA has reverted to £200,000. This can result in the total expenditure for the year being within the overall AIA limit, but as it is incurred on or after 1 January 2022, the application of the cap prevents immediate relief for the full amount.

For further information on what qualifies for the annual investment allowance, the amounts that can be claimed and the timing of the expenditure, please contact Head of EQ Engineering & Manufacturing, Ross Oliphant, or contact our Glenrothes office on 01592 630055.