Transitional Rules for Capital Allowances

The annual investment allowance (AIA) has been at a temporary increased amount of £1 million since January 2019. This was supposed to revert to £200,000 after 31 December 2021 but has been extended for various reasons until 31 March 2023. As we are now in the final twelve months of the increase (subject to any further extension), it’s a good time to look at how the transitional rules work for accounting periods that straddle 31 March 2023.

The super deduction is also available until 31 March 2023, however this is only available to companies, and even then there are reasons why using the AIA may be preferable in any case.

Where the accounting period straddles 31 March 2023, the total AIA available is calculated by applying the following formula:

(a/12 x £1,000,000) + (b/12 x £200,000)

So, if a business has an accounting date of 30 June, the maximum AIA will be £600,000. However, things are not that simple. Where the expenditure is incurred after 31 March 2023, the AIA is restricted to the part applicable to that period, i.e. (b/12 x £200,000). For a business with a 30 June year end, this would mean the cap would be £100,000 – even though the AIA for the whole year is £600,000.

Forward planning is now required. If there is to be significant expenditure that is to be relieved using the AIA, it should be incurred prior to 31 March 2023 to ensure that maximum relief is available.

It is worth remembering that the date that expenditure is incurred is the date that the contract is signed, not necessarily the date payment is physically made, as long as there is a binding obligation to pay the relevant amount within four months. So, a contract signed in March 2023 but paid in May 2023 will avoid the problem described above.

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