Annual Investment Allowance for accounting periods straddling 1 April 2023

Currently the maximum Annual Investment Allowance (AIA) available on expenditure incurred on plant and Machinery (P&M) is £1,000,000. From 1 April 2023 this drops to £200,000 – so how will the affect claimants whose accounting period straddles this date?

First, we need to understand what happens to the AIA for short accounting periods. If a business’s accounting period is less than 12 months long then the AIA is proportionately reduced.

It should also be noted that a business can decide which expenditure to allocate the AIA against, it is therefore important to consider the timing of capital expenditure.

Where an accounting period straddles a change in the rate of the AIA we break the accounting period into two notional parts, the part before the change and the part after the change. The separate AIA entitlements for each of these notional periods is calculated on a time apportionment basis, so for example a 12 month accounting period ending 30 June 2023 would be broken down into the following 2 notional periods with the following time apportioned entitlements:

31 March 2023 – 9 Months – £750,000 AIA (being 9/12 x £1,000,000)

30 June 2023 – 3 Months – £50,000 (being 3/12 x £200,000)

These are then added together to give the AIA for the whole accounting period of £800,000.

There is however a complication in the rules when the rate of AIA falls. Again using a year end of 30 June 2023 as an example, during the first notional period the business can utilise the full £800,000 calculated for the entire accounting year for expenditure incurred within that notional period, but for the second notional period the maximum AIA that can be allocated to expenditure within that period is limited to the time apportioned amount calculated for that short period, here £50,000.

This leads to a slightly counterintuitive result whereby if a business buys P&M for £400,000 in the first notional period, and for £200,000 in the second notional period, ie total expenditure of £600,000, then the claim in the second period is limited to a maximum of £50,000 so the AIA claimed for the whole period is £450,000.

Worse that than, if a company with a 30 June 2023 year end were to delay spending £800,000 on P&M until after 31 March 2023 they may lose out on £750,000 of AIA.

In summary the 12 month maximum for each accounting period straddling 31 March 2023:

We will update you with more information as more details, guidance, and legislation is introduced.

As mentioned above, in the first notional period the max AIA available is the total calculated for the 12 month accounting period, ie the fourth column.  In the second period the max AIA available is the total apportionment for that period, ie the third column.

The total claim for the period can never exceed the total for the year, so a company with a year end of 30 September 2023 that spends £600,000 in the first half of the year, and £50,000 in the second half of the year, can only claim £600,000 in total, however in this example it can allocate this £600,000 against the £650,000 expenditure however it sees fit.

For an unincorporated business where an asset is used partly in the business and partly for private use, the amount of AIA is reduced on a just and reasonable basis for that asset.

For an unincorporated business where an asset is used partly in the business and partly for private use, the amount of AIA is reduced on a just and reasonable basis for that asset.

Finally, as there are many rates of capital allowances, 130% super deduction for companies, 100% first year allowances, general pool, and special rate pool it is important to allocate the AIA in the most beneficial way, remembering that not all assets qualify for the AIA, such as cars.

Jim Calverley – 7 September 2022