My client company has a year-end of 31st May 2019 and throughout the year the company incurred capital expenditure that qualifies for the annual investment allowance (AIA). How do we determine the amount of AIA available and how do we allocate the AIA to the qualifying expenditure given that the amount of AIA went up from £200,000 to £1m in January 2019?
For qualifying expenditure incurred since 1 January 2016, 100% AIA has been available for expenditure of up to £200k for the year. The Government introduced a temporary two-year increase to the AIA limit to £1m from 1 January 2019, which will revert to £200k on 1 January 2021.
Where we have a year-end that straddles 1 January 2019, there are transitional rules to determine the maximum AIA available for the year. This is simply calculated on a time apportionment basis by splitting the year into the period before 1 January 2019 and the period after 1 January 2019.
For your client, their maximum AIA available for the year would be as follows:
1 June 2018 – 31 December 2018 (7months) = 7/12 x £200k = £116,667
1 Jan 2019 – 31 May 2019 (5months) = 5/12 x £1m = £416,667
Maximum AIA available for the y/e 31 May 2019 = £116,667 + £416,667 = £533,334
Note – many callers think that due to the above calculation, this means only £116,667 of AIA is available for expenditure incurred before 1 Jan 2019, but this is incorrect. This time apportionment is to calculate the maximum AIA available for the year. There is, however, a different restriction to the qualifying expenditure available for AIA in the pre-1 Jan 2019 period – see below.
Whilst the above is the maximum AIA available for the year, there is a restriction for capital expenditure qualifying for AIA incurred in the period prior to 1 Jan 2019. Only a maximum of £200k of actual expenditure falling in the period before 1 Jan 2019 can qualify for AIA.
Example 1 – if your client incurs qualifying expenditure of £350k in the 7months to 31 Dec 2018, only £200k of this is covered by AIA. This will result in £333,334 (the max AIA available of £533,334 less £200k used) of AIA left for the 5months to 31 May 2019.
Example 2 – if your client only incurs £125k of AIA expenditure in the pre-1 Jan 2019 period, this leaves available AIA of £408,334 (max AIA of £533,554 less £125k used) for the 5months to 31 May 2019.
There are some similar transitional provisions that apply for periods straddling 1 Jan 2021 when the AIA reverts. We still use time apportionment to determine the maximum AIA available for the year. However, for the part of the straddle period that falls after 1 Jan 2021, the AIA available is restricted to the proportionate amount of £200k e.g if we have a 30 April 2021 year end, only 4/12 x 200k = £66,667 of AIA is available for expenditure incurred in that post 1 Jan 2021 period.
Therefore, for those clients that may have periods straddling 1 Jan 2021, we should bear in mind when the capital expenditure is to be incurred to make use of the maximum AIA available.
The straddling provisions can be found in Schedule 13 of FA 2019.
In association with Croner Taxwise
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