From the 1st January 2021, the annual investment allowance (AIA) will drop back from the temporary increase of £1m to £200k.

Businesses that invest in plant, equipment, machinery or similar will need to plan their expenditure to ensure they maximise the availability of the enhanced AIA up to 31st December 2020. For example:

For the year ending 31st March 2021, the AIA limit for this period will be £800,000.

This is 9/12 of £1,000,000 = £750,000 (pre 31/12/2020) and 3/12 of £200,000 = £50,000 (post 31/12/2020), £800,000 in total.

However, for the 3-month period 1st January 2021 to 31st March 2021, the limit is £50,000 (3/12 x £200,000).

Even though the AIA has reduced from £1,000,000 to £200,000, a business would only be entitled to AIA of £50,000 on expenditure in the 3 month period from 1st January 2021 to 31st March 2021.

Businesses with a year-end of 31st December are not affected by the transitional rules.

In summary, apart from a business with a year ending 31st December 2021, and despite the fact that the AIA reverts to £200,000 on 1 January 2021, a business will not receive the maximum AIA of £200,000 for qualifying expenditure incurred in 2021.  Therefore, for those companies that may have periods straddling 1 January 2021, it is important to bear in mind when the capital expenditure is to be incurred to make use of the maximum AIA available.

If you think your business may be affected by these transitional rules and would like further advice, please contact our tax partner, Alex White on 0161 832 6221 or email [email protected].