Changes to capital allowances ‘could disadvantage some businesses’

Chancellor Philip Hammond used the 2018 Autumn Budget to unveil significant changes to the capital allowances regime.

The majority of UK firms are able to claim a 100% Annual Investment Allowance (AIA) on the first portion of expenditure on most types of plant and machinery (excluding cars). The AIA applies to businesses of any size and most business structures: however, there are provisions to prevent multiple claims.

In the 2018 Autumn Budget, the Chancellor announced a temporary increase in the AIA, which will rise from £200,000 to £1 million. This applies to expenditure incurred from 1 January 2019 to 31 December 2020. Businesses are advised to time the purchase of plant and machinery carefully in order to make full use of the increase.

However, the Association of Taxation Technicians (ATT) has expressed concerns that the temporary increase in the AIA could actually reduce the tax relief available to some firms.

The provisions contained within Finance Bill 2018-19 mean that a business with a year end of 31 March 2021 would have an effective AIA limit of £800,000, provided the business had incurred all of its qualifying expenditure for that year in the nine months to 31 December 2020.

However, if the expenditure was instead incurred in the three months to 31 March 2021, the amount of AIA available would be restricted to £50,000. In light of this, the ATT has proposed the introduction of an opt-out clause.

Commenting on the issue, Jon Stride, Co-Chair of the Technical Steering Group at the ATT, said: ‘Without the type of measure which we are suggesting, many businesses (other than those with a 31 December year-end) will have to consider the tax implications of the precise timing of their capital expenditure.’

Mr Hammond also announced a new capital allowances regime for structures and buildings. The Structures and Buildings Allowance will apply to new non-residential structures and buildings. Relief will be provided on eligible construction costs incurred on or after 29 October 2018, at an annual rate of 2% on a straight-line basis. Relief will not be available for the costs of land or dwellings.

For advice on optimising the AIA for your business, please contact us