Ups and downs of capital allowances

Ups and downs of capital allowances
The annual investment allowance (AIA) £1 million limit, originally due to end on 31 December 2020, will now run until 31 December 2021.

The good news is that the annual investment allowance (AIA) £1 million limit, originally due to end on 31 December 2020, will now run until 31 December 2021. However, a cap on research and development (R&D) relief, aimed at preventing fraudulent claims, will come in on 1 April 2021, after being postponed from April 2020. 

Annual investment allowance

The AIA limit was due to revert to £200,000 on 1 January 2021, but the £1 million temporary limit will now run for another year. The government wants to bolster manufacturing activity, although the short notice will be unhelpful for any business that has brought forward investment in anticipation of a reduced limit. In contrast, businesses that have not been able to go ahead with investment plans because of Covid-19 or Brexit constraints will benefit.

Claiming the AIA means that capital expenditure is effectively treated as a deductible expense and this could be particularly beneficial where expenditure would otherwise only qualify for the 6% writing-down allowance. The AIA cannot be claimed for motor cars, but lorries, trucks and most vans qualify.

If you are planning ahead for, say, a 31 March 2021 year end, it is important to know when an item is treated as bought:

  • Where payment for the item is due within four months, it is treated a bought on the date when the contract is signed
  • Where payment is due more than four months after the date of signing the contract, the item is only treated as a purchase when the payment is due. There is an exception for an item purchased under a hire purchase contract, in which case the whole cost can be claimed when you start using the item.

R&D relief

A loss-making company can receive a cashflow benefit by surrendering its loss against the payable 14.5% R&D tax credit available to small or medium-sized enterprises. From 1 April 2021, this payable tax credit is to be capped at:

  • £20,000 (equivalent to approximately £60,000 of R&D expenditure), plus
  • 300% of the company’s total PAYE and NICs liability for the period (this is for all the company’s employees, not just R&D staff).

So, for a company with PAYE and NICs of £45,000, the cap will be £155,000 (£20,000 + (£45,000 x 300%)).

Claims for payable credits of under £20,000 are exempt from the new cap, and there is a further exemption where a business is involved in the active management of intellectual property. 

Although most companies should not be affected by the cap, there are likely to be increased professional and compliance costs.