Annual Investment Allowance for accounting periods straddling 1 January 2022

Currently the maximum Annual Investment Allowance (AIA) available on expenditure incurred on Plant and Machinery (P&M) is £1,000,000. From 1 January 2022 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 31 March 2022 would be broken down into the following 2 notional periods with the following time apportioned entitlements:

  • 31 December 2021 – 9 Months – £750,000 AIA (being 9/12 x £1,000,000)
  • 31 March 2022 – 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 31 March 2022 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, as if the change in rates did not exist.

For the second notional period which falls after 1 January 2022, however, the maximum AIA that can be allocated to expenditure within that period is limited to the time apportioned which falls at the reduced rate (calculated above as £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 31 March 2022 year end were to delay spending £800,000 on P&M until 2022, they may lose out on £750,000 of AIA.

In summary the 12-month maximum for each accounting period straddling 31 December 2021:

Year End 1st Notional Period (£) 2nd Notional Period (£) AIA for 12 AP (£)
31 January 2022 916,667 16,667 933,333
28 February 2022 833,333 33,333 866,667
31 March 2022 750,000 50,000 800,000
30 April 2022 666,667 66,667 733,333
31 May 2022 583,333 83,333 666,667
30 June 2022 500,000 100,000 600,000
31 July 2022 416,667 116,667 533,333
31 August 2022 333,333 133,333 466,667
30 September 2022 250,000 150,000 400,000
30 October 2022 166,667 166,667 333,333
31 November 2022 83,333 183,333 266,667

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 June 2022 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. Finally, as there are many rates of capital allowances, 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.

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