With the postponement of the Autumn budget, which has now been rescheduled until Spring, there have been a number of announcements made by the Government within the past few weeks in relation to various changes in taxation.

One of the significant changes we have noted, and a welcome advantage for many UK Corporate entities is the extension temporary increase of the Annual Investment Allowance (AIA) to 1 January 2022. The move is to help businesses looking to invest in plant and machinery, with the benefit of an extended tax break.

The Government will allow businesses to continue to claim up to £1million through the Annual Investment Allowance within their Corporation Tax return for the purchase of plant and machinery.

How does the Annual Investment Allowance work?

The Annual Investment Allowance is a tax relief utilised within a Corporate entities Corporation Tax return. It allows businesses a 100% allowance for expenditure on qualifying plant and machinery which has been purchased during the financial year. It works alongside Capital Allowances within the Corporation Tax return.

Within the financial statements, tangible assets are depreciated in line with the Company’s accounting policy. Depreciation not only reduces the value of the asset within the financial statements but is also expensed to the profit and loss account, ultimately reducing profits.

Within the Corporation Tax return, depreciation is treated as an add back and is not an allowable deduction for tax purposes. Instead, the deduction is replaced by Capital Allowances – in this case, most assets purchased would b qualifying expenditure, as such would fall under the Annual Investment Allowance.

How does this help your Company?

In the past, and for the financial year ends to 31 December 2018, the Annual Investment Allowance was capped at £200,000. Although this was temporarily increased to £1m up until 31 December 2020, the government has now extended this increase to 1 January 2022. After which it will fall back to £200,000 unless the Government decides to extend the cap for AIA again.

Essentially, the increase by the Government on the Annual Investment Allowances means Companies can invest in plant and machinery, whilst gaining 100% of the cost (capped at £1m) back through their Corporation Tax return.

The decision by the Government to extend the temporary increase is intended to boost the confidence of Companies during the current pandemic. It allows companies to look to the future, whilst gaining a tax break on assets purchased for business use.

Financial Secretary to the Treasury Jesse Norman said: “It is vital that we support businesses through the difficult months ahead. Extending the Annual Investment Allowance’s £1 million cap will give businesses the confidence they need to invest into next year, helping them to grow whilst benefitting the wider economy too.”

How can we help you? 

Get in touch with our corporate tax experts and accounting team who can help you plan your financials and tax position going forward. Our team can also work with you on your year-end reporting to ensure the claim for Annual Investment Allowances has been utilised in the most efficient way.

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