“Intricacies” of investment allowance could catch out taxpayers

The Association of Taxation Technicians (ATT) has called for the Government to protect businesses from the “strange arithmetic intricacies” resulting from the permanent increase of the Annual Investment Allowance to prevent them unwittingly going over their allowances this year.

The Government confirmed in November’s Autumn Statement that the level of the Annual Investment Allowance, which allows businesses to deduct the full value of a qualifying item from their profits before paying tax, will be permanently increased to £1,000,000 from 1 April 2023. It has been set at this level since 1 January 2019 as a temporary measure.¹

But the ATT says the Government should amend the draft legislation to ensure businesses with accounting periods that straddle the 1 April 2023 date are still entitled to the full allowance across any 12-month period.²

Currently, those with accounting periods running both before and after April 2023 will only be eligible for a pro-rata portion of the allowance in each period. For the period before 31 March 2023, businesses can “borrow” the pro-rata proportion from after 1 April 2023, creating the full £1,000,000 available for qualifying expenditure incurred before 31 March 2023.

However, this does not apply in reverse, with businesses unable to “borrow” any unused allowance from before 1 April 2023. This means a business with a calendar year accounting period ending on 31 December 2023 may incur all its qualifying expenditure after 1 April 2023, and not realise that its maximum allowance would only be £750,000 (nine-twelfths of £1,000,000).

In an even more extreme example, for a business with a 30 June 2023 year-end, the limit on expenditure incurred after 31 March 2023 would be just £250,000 (three-twelfths of £1,000,000), even if it had incurred no qualifying expenditure at all before 1 April 2023.

Jon Stride, vice chair of ATT’s Technical Steering Group, said:

“The absence of any change in the annual investment allowance limit between 31 March and 1 April 2023 might have been expected to avoid the strange arithmetic intricacies associated with the ending of a temporary increase.

“However, the legislation includes requirements concerning the second straddling period after 1 April 2023 which we worry would disproportionately affect some businesses. It is also likely to come as a surprise to many taxpayers given that there has been no effective change in the overall limit.

“Amending legislation to remove this requirement would create an unbroken entitlement to the full £1,000,000 for the period after 1 April 2023 and eliminate any need for an unexpectedly restricted time-apportioned allowance.”