THE ONE MILLION POUND QUESTION
“I’ve got a brand-new combine harvester, can I claim the cost of that beauty back !!!”, was something one of the Worzels, probably never asked his accountant back in the day.
Every year you can deduct the full value of an item that qualifies for annual investment allowance (AIA) from your profits before tax and after a two year rise to £1m the maximum reverts to £200k from Jan 2021.
So 40 years on from the Worzels, it is actually the £1,000,000 question for anyone you know, who is about to buy or finance the substantial purchase of plant and machinery before 2021 arrives, as the rules are the kit must be in operational use before New Year’s Day.
What does this mean for you in practice?
If you make profits each year you can offset the costs of plant or machinery up to a maximum of £1m
· if that machinery is bought outright,
· already financed for purchase and in use by December 31st, 2020
However, if you left it until 1st Jan 2021 to: -
· buy the machine outright
· agreed finance to purchase but the machine wasn’t in operational use before Jan 21,
The maximum purchase value you can offset to tax drops by a huge amount to £200,000
Clearly many expensive purchases take time to build and deliver so be aware the clock is ticking if you have substantial purchase to make.
You will need to adjust your AIA if your accounting period is more or less than 12 months and you should check with your manager here what your own Annual Investment Allowance is based on the portion of your tax year that falls within your accounting period (financial year)
Let’s explain that with an example, as you get a new allowance for each accounting period.
If your accounting period is 9 months the AIA will be 9/12 x £200,000 = £150,000.
You may also need to take into account changes to the AIA in that time.
The rules are different if your accounting period is longer than 18 months or you have a gap or overlap between accounting periods.
If you need any help just call your manager on 01995 600600.