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Annual Investment Allowance: Straddling

Q. A company has a year end of 31 May 2019 and throughout the year they incurred capital expenditure that qualifies for the annual investment allowance (AIA). How do we determine the amount of AIA available and allocate the tax relief to the qualifying expenditure given that the amount of the allowance went up from £200,000 to £1m in January 2019?

A. For qualifying expenditure incurred since 1 January 2016, 100% AIA has been available for expenditure of up to £200,000 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 £200,000 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 the company, the maximum AIA available for the year would be as follows:

1 June 2018 – 31 December 2018 (seven months) = 7/12 x £200k = £116,667

1 Jan 2019 – 31 May 2019 (five months) = 5/12 x £1m = £416,667

Maximum AIA available for the year end 31 May 2019 = £116,667 + £416,667 = £533,334

It is important to note that although many people think that due to the above calculation, this means only £116,667 of AIA is available for expenditure incurred before 1 January 2019, 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 January 2019 period, as explained below.

While 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 January 2019. Only a maximum of £200,000 of actual expenditure falling in the period before 1 January 2019 can qualify for AIA.

Example 1 – if the company incurs qualifying expenditure of £350,000 in the seven months to 31 Dec 2018, only £200,000 of this is covered by AIA. This will result in £333,334 (the max AIA available of £533,334, less £200,000 used) of AIA left for the five months to 31 May 2019.

Example 2 – if the company only incurs £125,000 of AIA expenditure in the pre 1 January 2019 period, this leaves available AIA of £408,334 (max AIA of £533,554 less £125,000 used) for the five months to 31 May 2019.

There are some similar transitional provisions that apply for periods straddling 1 January 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 January 2021, the AIA available is restricted to the proportionate amount of £200,000, eg, if there is a 30 April 2021 year end, only 4/12 x £200,000 = £66,667 of AIA is available for expenditure incurred in that post 1 January 2021 period.

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.

The straddling provisions can be found in Schedule 13 of Finance Act 2019.

By CronerTaxwise