Fearful of what the post-Brexit UK economy will be, many companies have been reluctant to invest in capital expenditure. As part of an initiative to encourage capital investment, the government are offering tax relief of up to £2million for qualifying expenditure incurred between now and 31 December 2020.
The relief is obtained by the company claiming Annual Investment Allowance (AIA) in their corporation tax return. AIA is a year-one capital allowance, which reduces taxable profits. This allowance has been around for a numbers of years, but has been increased temporarily to £1million per annum until 31 December 2020.
AIA can only be claimed on qualifying expenditure, which broadly means plant and machinery, but could extend to elements within commercial buildings. A claim for building expenditure should be subject to a capital allowance review undertaken by a qualified professional.
If your company lacks sufficient cash reserves to invest £2million before 31 December 2020, you may believe this initiative has no relevance. However, if your company enters into a hire purchase contract to acquire qualifying assets, it will be entitled to claim AIA in the period the contract is entered into. The tax relief available will be based on the future payments to be made under the hire purchase contract.
This offers an opportunity for cash strapped businesses to reduce their corporation tax liability, at the same time as investing in their business without incurring significant cash outflows, initially. Such companies may hope that future hire purchase payments could be funded by an increase in profits generated by the capital investment.
As the increase to AIA is temporary, before investing we would advise you to consult with your tax advisor. A specialist team can help identify qualifying expenditure and confirm when you need to have incurred it or entered into the hire purchase contract in order to maximise relief, and avoid the potential pitfalls associated with AIA.
Companies whose year-end is not aligned with the calendar year need to be aware that transactional rules may restrict relief. For example, a company, with a year ending 31 November 2021, invests £1million on qualifying expenditure on 31 December 2020 will only be entitled to claim AIA on £266k of the expenditure and not £1million they may have expected.