How the £1m tax relief is set to change

From 1st January 2021, the value of the annual investment is set to drop dramatically. NEIL MOON, Director of Tax at Page Kirk, gives some context and discusses the implications.

Capital allowances are a form of tax relief for expenditure incurred on equipment used by a business in its trade. Examples include machinery and motor vehicles. Tax relief is given by deducting a proportion of the cost of the equipment over a period of time.

The Government sets the proportion of relief available, and it is currently set at either 8% or 18% depending on the type of equipment.

Example:

John buys a van for use in his business. His business prepares accounts to 31 March. The vehicle cost him £10,000 on 1 April 2019 and John will claim a deduction from his profits of 18% per year until he has received tax relief on the entire cost.

Annual investment allowance

A business can incur expenditure on equipment of up to £200,000 and receive a 100% allowance in the accounting period it is incurred. This is called the 'annual investment allowance'. From 1 January 2019, this allowance temporarily increased to £1m until 31 December 2020.

Example:

Using the example above, John should claim the annual investment allowance and receive a deduction from his profits of £10,000 in the year to 31 March 2020.

An important change coming up

From 1 January 2021, the annual investment allowance will reduce to £200,000. The annual allowance, for businesses preparing accounts to a date other than 31 December, will be split into two periods.

We can calculate the annual allowance available for each split period, and the overall maximum allowance. Because of these split-period rules, it is important to discuss and plan the timing of expenditure on equipment with our tax department.

For more information call 0115 955 555500 or email enquiries@pagekirk.co.uk