The temporary increase to £1 million is only available for qualifying expenditure incurred in 2019 and 2020. If you have a 31st December year end, then the position is straightforward, as your December 2020 year end will coincide exactly with the decrease in the limit. Plainly speaking £1 million potential relief in 2020 and £200,000 potential relief in 2021.
If on the other hand, you have any year end other than 31st December, things become much more complicated. Due to how the available AIA relief is calculated, for businesses whose financial year spans the calendar year (31st March or 5th April for example), their effective AIA limit is restricted to significantly less than £200,000.
How The Potential AIA Tax Relief Is Calculated?
The maximum AIA relief for the whole 12-month period is calculated by aggregating the time-apportioned amount of each of the £1m and the £200,000 limits.
Example: 31st March year end
A business with a 31st March year end will have a chargeable period which runs from 1st April 2020 to 31st March 2021. The overall AIA available to them for this period will be £800,000, being the total of the following two amounts:
However, whether or not the full £800,000 limit is available will depend on when the company incurs its qualifying expenditure within the year to 31st March 2021.
Timing Makes A BIG Difference
The transitional rules mean the maximum AIA for expenditure incurred in the three-month period from 1 January 2021 will be restricted to £50,000 (calculated as above), without taking into account the level of expenditure in the nine months to 31 December 2020.
Purchases made in the nine months 1st April 2020 to 31st December 2020 can benefit from up to the maximum potential relief of £800,000. However, the restricted £50,000 level of AIA available for purchases made in the remaining three months from 1st January 2021 applies.
This means that, in a worst-case scenario, for a business with a 31st March year end, if the business didn’t buy any qualifying assets in the run up to 31st December 2020 their AIA for the year ending 31st March 2021 will only be £50,000.
BIG Difference Too For January And June Year Ends:
January Year End - For a business with a January year end, the potential AIA relief for items purchased in January 2021 would be just £16,667.
June Year End - For a business with a June year end, the potential AIA relief for any items purchased in the period 1st January to 30th June 2021 will only be £100,000.
2020 has seen unprecedented challenges, impacting supply and demand alike. However, at the time of writing there has been no announcement to extend the temporary increase which would have given more businesses time to benefit. Therefore, businesses which need to make qualifying purchases, would be wise to consider doing so before the relief drops – saving them £’000s in tax they would otherwise need to pay.
Can I Claim AIA on Purchases Made via Hire Purchase?
Yes, you can claim the AIA against qualifying assets placed on Hire Purchase (HP) – just as if you had paid cash. Therefore, you can enter into a Hire Purchase agreement for qualifying assets and benefit from the relief prior to all the payments of the agreement being made, in addition to the normal cash flow benefits of using Hire Purchase. If you would like to discuss any purchases using Hire Purchase including bespoke repayment options to suit the needs of your business, please click here to request a call back from your local Relationship Manager.
JCB Finance Ltd Registered in England No.972265 Registered Office: The Mill, Rocester, Staffordshire, ST14 5JW. JCB Finance Ltd is authorised and regulated by the Financial Conduct Authority. Finance is restricted to business users in the United Kingdom, subject to acceptance by JCB Finance Ltd and our usual affordability checks. Terms apply. JCB Finance Ltd is not a tax or financial advisor - always seek advice from your accountant or finance director, because every business’ circumstances are different. Businesses should not make investment decisions purely on a tax basis - there should be a compelling business case for the investment.