In the 2018 Budget the Chancellor announced a temporary increase in the Annual Investment Allowance (AIA) from £200,000 to £1,000,000 with it scheduled to revert back to £200,000 on 1st January 2021.
The enhanced AIA of £1,000,000 is available for capital expenditure on plant, machinery and commercial vehicles (not cars) purchased from 1st January 2019 until 31st December 2020. This is an important tax incentive which accelerates the tax relief so that 100% of eligible expenditure can be offset against taxable profits in the first year instead of taking up to 12 years to reclaim 90% of the original costs using the normal 18% annual writing down allowance. In effect this enables businesses to save £1 in taxable profits for every £1 spent. The net benefit will depend on the rate of income tax or corporation tax that your business pays. It is the equivalent of a subsidy to encourage businesses to invest in plant and machinery.
Capital expenditure via a Hire Purchase (HP) agreement is also eligible for exactly the same AIA, just as if you had paid cash, but you will also gain a terrific cash flow advantage. Potentially your business could gain up to £1,000,000 in tax relief after only having paid the deposit and the interest charge is also 100% tax deductible. All businesses can claim the AIA – the only exceptions are Mixed Partnerships or Trusts (i.e those in which a company is a member). If you have not already planned how to maximise the benefit speak to your accountant or finance director now.
TIMING IS CRITICAL
The chart below illustrates the maximum amounts available by showing four different financial year end companies and how vital it is to spend the right amount within the right periods in order to maximise tax benefits. Different financial years that straddle either the tax year or calendar year may result in complicated calculations that could result in a lesser AIA being granted in that financial year. Given the lead times of some plant and machinery, from order to delivery, this also needs to be carefully factored in to your buying plans. Get the timing and/or the amounts wrong and your business could either miss out on available tax relief or worst still, end up paying far more tax then is required.
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Terms: JCB Finance provides asset finance including Hire Purchase facilities for UK businesses but is not a tax or financial advisor – always seek advice from your accountant or tax advisor as every business’ circumstances are different. JCB Finance Ltd is authorised and regulated by the Financial Conduct Authority (Firm Reference Number: 708332).