What is the Annual Investment Allowance?
The Annual Investment Allowance (AIA) is a valuable tax relief that allows businesses to deduct the full cost of qualifying plant and machinery from their taxable profits. This means that, instead of claiming relief over several years, businesses can often obtain 100% tax relief upfront.
The AIA is currently capped at £1 million per year, and a fresh allowance is available for each accounting period (adjusted if the period is shorter or longer than 12 months).
Most plant and machinery qualifies, including items such as tools, machinery, vans, office equipment, computers and certain building fixtures. However, AIA cannot be claimed on cars, assets previously owned for non-business use or items given to the business.
AIA is available to sole traders, partnerships and companies. However, it is only available to partnerships where all partners are individuals, mixed partnerships that include companies do not qualify.
Timing is important. You can only claim AIA in the period the expenditure is incurred. This is usually the date the contract is signed if payment is due within four months, or the date payment becomes due if later. Special rules apply for hire purchase.
If you do not want to claim the full amount you can claim part of the cost and carry forward the balance using writing down allowances.
Used correctly, AIA can significantly reduce a business’s tax bill, particularly where there is substantial investment in equipment.
What is the Annual Investment Allowance?
The Annual Investment Allowance (AIA) is a generous tax relief that was first introduced in 2008. The AIA allows for the total amount of qualifying expenditure on plant, machinery, commercial vehicles and other qualifying equipment to be deducted from your profits before tax.
The AIA can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a furnished holiday let. Only partnerships or trusts with a mixture of individuals and companies in the business structure are unable to qualify for AIA.
The AIA was permanently set at £200,000 for all qualifying expenditure on or after 1 January 2016. However, this limit has been temporarily increased to £1 million for a 2-year period from 1 January 2019 to 31 December 2020. This increased limit is a generous allowance and should cover the annual spend of most small and medium sized businesses.
The AIA does not apply to purchases of cars.
If you are thinking of incurring large items of capital expenditure for your business over the coming months, you should ensure that any purchase is properly timed to take full advantage of the temporary increase in the AIA limit.
