Annual Investment Allowance – Timing is Everything

On Monday, 29th October Philip Hammond, the Chancellor of the Exchequer announced a wide ranging set of budget measures including a temporary increase in the Annual Investment Allowance (‘AIA’) from £200,000 to £1m per annum for a two year period between 1 January 2019 and 31 December 2020.

This is great news for manufacturing businesses looking to invest in their plant and equipment over the next two years as it means that any expenditure on qualifying plant and equipment such as machinery, but not cars, up to a maximum of £1m will attract 100% tax relief in the year that it is purchased. At current rates, this is the equivalent to a £190,000 reduction in corporation tax in the year.

AIA is an allowance that has seen some change since its introduction and has been as high as £500,000 previously so this increase is substantial and the effect not underestimated.

BUT – before you rush out and spend that £1m on new plant in January 2019, businesses need to be aware of the transitional rules that apply where an accounting period spans the operative date of the increase.

Example:

If, for example, you have an accounting year ending 31 March 2019, the AIA will be apportioned at the relevant levels across the period. In other words the maximum AIA available will be as follows:

9 months at £200,000 = £150,000

3 months at £1,000,000 = £250,000

Total - £400,000

The above example will result in the maximum available AIA available in this case to £400,000 which is substantially less than the £1m headline figure. Anything above £400,000 in that period would fall into standard capital allowance regime and attract relief over a much longer period of time.

The above illustrates that when it comes to AIA, timing is everything. With careful planning of the investment in new plant and equipment, these allowances can be maximized hence projects should be assessed at an early stage.

How can we help?

Armstrong Watson’s tax team are vastly experienced in assisting businesses with their proposed investments in plant and machinery, in order to maximize the AIA and other reliefs available on such investment. Additionally our team can help identify any funding required that may hold the investment back.

There is also a time limit on the increased AIA, so it should be considered at the earliest opportunity.

Note: there are a range of other announcements in the 2018 budget that are particularly relevant for the manufacturing sector that are dealt with elsewhere.

Structures and Building Allowance (‘SBA’)

Any new non-residential structures and buildings will be eligible for a 2% straight-line capital allowance (called a “Structures and Buildings Allowance”) where contracts for physical construction works are entered into after 29 October 2018.

At present, companies account for the depreciation on buildings and structures, but do not receive any tax relief on this expenditure. The intention of this new relief is to stimulate investment in structures and buildings that are intended for economic activity. The relief will be limited to the original cost of construction or renovation, relieved across a fixed 50-year period, regardless of ownership changes. It should be noted that this relief is available for both UK and overseas structures and buildings, where the business is within the charge to UK tax. Also, SBA expenditure will not qualify for AIA, and is therefore an additional allowance.

This new relief is good news for those constructing buildings and structures for their businesses. It provides relief on costs that previously would only have been obtained upon the sale of the property and as such provides a tax benefit ongoing from investment in business premises.

The good news is partially offset by the reduction in the rate of capital allowances available through the special pool writing down allowances (which applies to “integral features” within buildings, such as heating and water systems). This has been reduced from 8% to 6% which will still give a full tax deduction for such costs but in future over a more extended period.

Research and Development Tax Relief (R&D)

Research and Development Tax Relief (‘R&D’) continues to be a valuable relief which allows companies to obtain up to 230% corporation tax relief on eligible expenditure. This relief has remained largely untouched in the 2018 budget.

However, to help prevent abuse of R&D Tax Credits, where loss making companies can claim a payable credit, from 1 April 2020 the amount of payable R&D tax credit that a qualifying loss-making company can receive in any tax year will be restricted to three times the company’s total PAYE and NICs liability for that year.

We cannot emphasise enough that R&D is not just something that is carried out by people in white coats and can occur each time that you encounter a scientific or technological challenge that needs to be overcome.

If you would like to discuss R&D with us, please contact our tax team.

Apprenticeships

The government has committed to provide up to £240 million to halve the co-investment rate for apprenticeship training to 5%.

The government will also provide up to £5 million to the Institute for Apprenticeships and National Apprenticeship Service in 2019-20, to identify gaps in the training provider market and increase the number of employer-designed apprenticeship standards available to employers. All new apprentices will start on these new, higher-quality courses from September 2020.

National Minimum Wage (‘NMW’)

New NMW rates were announced and will apply from April 2019 as follows:

• increasing the rate for 21 to 24 year olds by 4.3% from £7.38 to £7.70 per hour

• increasing the rate for 18 to 20 year olds by 4.2% from £5.90 to £6.15 per hour

• increasing the rate for 16 to 17 year olds by 3.6% from £4.20 to £4.35 per hour

• increasing the rate for apprentices by 5.4% from £3.70 to £3.90 per hour

If you have a question for Jim or would like more information about how the Budget could affect your manufacturing business, get in touch

Contact Jim

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