£1 million Annual Investment Allowance cap extended

The government has confirmed that the £1 million Annual Investment Allowance (AIA) cap will be extended throughout 2021 in a move to boost confidence as companies look to weather the pandemic and plan for the future.

The AIA was scheduled to reduce back down to £200,000 with effect from 1 January 2021. But with what has been an extremely difficult year for business, there was speculation on whether the increase would be extended to help stimulate the economy further during the recovery from Covid-19.

The Annual Investment Allowance £1 million temporary cap will now be extended until 1 January 2022. The government has stated that the cost of this should be covered by clamping down on tax avoidance.

What is the AIA?

The Annual Investment Allowance is a 100% upfront allowance which enables a business to write off expenditure on qualifying plant and machinery up to a specified amount each year. It is intended to encourage greater levels of investment in the economy by providing an increased incentive for businesses to invest in plant and machinery.

Most assets that qualify as plant and machinery for capital allowances will qualify for AIA. Some common examples are:

  • Computers
  • Office furniture and equipment
  • Vans and lorries
  • Machines used for business purposes
  • Certain fixtures such as air conditioning
  • Certain parts of a building referred to as ‘integral features’.

Assets that are excluded from AIA include buildings, cars and assets used solely for business entertainment. For sole traders and partnerships, there is a restriction on AIA entitlement for assets that are used partly for private purposes.

Although cars do not qualify for AIA, expenditure incurred before 1 April 2021 on electric cars or cars which have CO2 emissions not exceeding 50g/km will qualify for 100% first year allowances, provided that the cars are acquired new and unused. Read our fact sheet on electric car tax considerations for more information.

If you have any queries about any of the above, please get in touch with a member of our Tax Team on 01903 234094.

A version of this blog originally appeared on the website of one of our MHA association member firms, Tait Walker