Planning to invest in plant & machinery? Spend now to make the most of tax reliefs before they are reduced.

Annual Investment Allowance (AIA) is a form of tax relief for companies, sole traders and partnerships that allows 100% of the cost of qualifying expenditure on plant and machinery to be offset against business profits. The maximum AIA limit is currently £1,000,000. This was set to reduce from 1 January 2022, however, the government delayed the reduction by a further 15 months in a bid to support businesses and investment.

Now, from 1 April 2023, AIA on qualifying expenditure will be capped at £200,000 with any unrelieved balance only being eligible for the less advantageous Writing Down Allowance (WDA) of 18% for main pool items or 6% for special rate pool expenditure.

This coincides with the end of the 130% super-deduction, which is available for capital purchases made in the period 1 April 2021 to 31 March 2023 for incorporated businesses only. Unlike AIA, there is no upper limit of expenditure for the super-deduction, and the enhanced 30% makes this currently more favoured than AIA in certain cases. However, it is only applicable to brand new purchases, and the relief is not as attractive for special rate pool items for which the super-deduction is just 50%, compared from 100% AIA.

Beware the pitfalls of accounting periods straddling 31 March 2023

If your business has a year-end which straddles the 31 March 2023 the maximum amount of AIA that can be claimed is time apportioned. For example, if a business has a year end of 30 June 2023, the maximum amount of AIA that can be claimed is as follows:

1- The proportion of the period from 1 July 2022 to 31 March 2023

i.e. 9/12 x £1,000,000 = £750,000

2- The proportion of the period from 1 April 2023 to 30 June 2023

i.e. 3/12 x £200,000 = £50,000

This produces a maximum AIA claim in the period ended 30 June 2023 of £800,000.

Using the above year end, if all the expenditure falls into the period before 31 March 2023, then AIA up to the full amount of £800,000 will apply. However, any expenditure falling into the period after 31 March 2023 will be capped at £50,000.

For example, a business with a year end of 30 June 2023 purchases equipment totalling £600,000 as follows:

31 January 2023                £500,000

31 May 2023                       £100,000

The AIA claim will be £500,000 + £50,000 totalling £550,000, as the part of the expenditure after 31 March 2023 is capped at £50,000. The remaining balance will be available for WDA.

Future WDA may attract tax relief at a higher rate

Many businesses will want to claim the AIA in the period it is incurred due to the cashflow advantages it provides. However, from 1 April 2023, the rate of corporate tax is increasing for companies who have net profits that exceed £50,000. If profits exceed £250,000, then the corporate tax rate will rise to 25% and WDA, therefore, will attract tax relief at 25% compared from the current rate of 19%. The tax advantage of WDAs, however, is spread across time rather than achieved instantaneously.

If you would like to discuss any business plans and potential capital purchases, our team at DSG would be happy to advise and please do not hesitate to get in touch with your usual DSG contact.