In a welcome move, the government has announced that the temporary Annual Investment Allowance (AIA) cap will be extended for a further 12 months until 1 January 2022. The government says that this move is intended to boost confidence as companies look to weather the pandemic and plan for the future. This should also encourage investment on qualifying plant and machinery over the next 12 months.
The AIA allows for a 100% tax deduction on qualifying expenditure on plant and machinery to be deducted from your profits before tax. The relief is normally capped at £200,000 per annum but was temporarily increased to £1 million for a 2-year period from 1 January 2019 to 31 December 2020.
This increased temporary limit is a generous allowance and should cover the annual spend of most small and medium sized businesses. The AIA is available for most assets purchased by a business, such as machines and tools, vans, lorries, diggers, office equipment, building fixtures and computers. The AIA does not apply to cars.
The extension in the temporary limit means that businesses thinking of incurring large items of capital expenditure will now have additional time to consider their options during these uncertain times. There are complex transitional rules so the timing of any purchase should be carefully considered.