For customers with a financial year ending on 31st March, the time to review capital equipment expenditure for 2021 is now.
- The £1m cap on the Annual Investment Allowance has been extended until January 2022.
- Businesses paying Corporation Tax can make a tax saving of up to £190k on assets acquired in 2021.
- The AIA benefit can span both tax years 20/21 and 21/22 – those with a financial year-end in March may benefit from bringing forward capital equipment investment.
- Hire Purchase Agreements qualify for AIA – businesses can benefit from the tax allowances in their current accounting year but spread the cost of purchase.
One of the rare pieces of good news to have surfaced towards the end of last year was a report by the Office for National Statistics stating that UK productivity, measured by output per hour worked, increased at its fastest (year on year) rate in 15 years for the quarter ended September 2020. One explanation for this has been provided through research conducted by ‘Be The Business’, an industry-led campaign to raise standards and spread best practice. Their suggestion is that driven by necessity, many small and medium sized businesses are accelerating investment in new technology. The good news is that the tax system will continue to support business investment throughout 2021, but to take full advantage some businesses might need to act swiftly.
In November last year, the Chancellor announced that the Annual Investment Allowance (AIA) would be set at £1,000,000 for 2021, this marked a continuation of the allowance that was originally put in place only for 2019 and 2020. The AIA is the amount of money a business is able to spend on the purchase of capital equipment and claim the full tax allowance in the accounting year, in which the acquisition was completed. So, providing all assets bought are used for business purposes only, £1,000,000 of equipment can be purchased in 2021 and qualify for AIA which will provide a tax allowance of £190,000 for any business paying Corporation Tax at 19% for the accounting period, in which the equipment was acquired.
The key, however, to making full use of AIA is to ensure that the allowance is allocated in the most financially advantageous way between accounting years. This means that unless your customer has an accounting year that coincides with the calendar year (January to December), it will often prove beneficial to allocate the £1,000,000 allowance for 2021 between the two accounting years that fall within the calendar year and this is where 31st March becomes a significant date. Many businesses have a financial year that ends on that date; which means if they want to maximise AIA for both their current and next accounting years, they have up to £250,000 of annual investment allowance available between 1 January and 31st March 2021. This might provide a strong reason to bring forward any proposed capital equipment investment to ensure delivery during February and March.
The additional good news is that your customers can buy the equipment they need now and get the full benefits of the annual investment allowance available in February and March, without the need for a large cash outlay. This is possible because equipment subject to hire purchase finance agreements qualify for AIA in exactly the same way, as equipment purchased outright. In other words, your customers can get the tax allowances in their current accounting year but spread the cost of purchase over a number of years.
BNP Paribas Leasing Solutions is not authorised to provide tax advice. You should consult an accountant in order to understand the tax consequences of any investment decision.
Andy is an experienced sales and finance professional with over 25 years’ experience in sales aid leasing. Andy is widely recognised as an expert in business finance and has in recent years focused his attention on developing partner sales teams develop an understanding of how businesses secure project financing. His training programme – Finance Unlocked – is a highly rated customisable course and is offered at no cost to partners.
If you’re interested in helping your sales team overcome finance-related hurdles during the selling cycle, please get in touch with Andy on 07966 114 243 or email here.