What Is the Annual Investment Allowance?

The Annual Investment Allowance (AIA) is a form of tax relief on certain business assets. It allows a business to deduct the full value of qualifying items from its profits before tax during the year of purchase. This mechanism encourages businesses to invest in their operational assets, such as equipment and machinery. The current maximum amount that can be claimed in a year is £1 million, and this allowance can be utilized by individuals, partnerships, and companies.

Qualifying Assets and Expenditure

The AIA is available for most assets purchased for business use, broadly categorized as “plant and machinery.” This includes a wide array of items necessary for a company’s daily operations, such as office equipment like desks, chairs, and computer systems. The allowance covers tangible assets that have a physical substance and are used over the long term within the business.

Expenditure on commercial vehicles such as vans, lorries, and trucks used for business activities qualifies for the AIA. Integral features of a building are also eligible, which can include electrical systems, cold water systems, and air conditioning or ventilation systems. Certain fixtures, like kitchen fittings or bathroom suites installed for business purposes, can be claimed, and the costs of installing these assets can also be included.

To be eligible, the asset must be for business use. If an asset is used for both business and private purposes, the AIA can only be claimed on the portion of the cost related to its business use. The allowance covers both new and secondhand items, as long as they are not from a connected person or business.

Excluded Assets and Expenditure

While the AIA covers a broad range of business assets, several categories of expenditure are explicitly excluded. The most common exclusion is cars. Unlike commercial vehicles, passenger cars do not qualify for the AIA, regardless of whether they are used for business purposes.

Other significant exclusions involve land and buildings. The cost of purchasing land or constructing a building, including its structural elements like walls, floors, and roofs, cannot be claimed under the AIA. These are considered part of the business premises itself rather than the “plant and machinery” operating within it.

Assets that were given to the business or that the business owned for another reason before starting to use them in the trade are also ineligible. Furthermore, expenditure on items used solely for the purpose of business entertainment is not permitted. This prevents claims on assets not directly tied to the operational functions of the trade.

Navigating Special Circumstances

The application of the AIA can change depending on a business’s situation. For businesses with accounting periods that are not 12 months long, the AIA limit must be adjusted. The £1 million allowance is reduced proportionally for shorter periods and increased for longer ones.

Another consideration arises when multiple businesses are operated by the same person or are otherwise connected. Businesses under common control are required to share a single AIA. For example, if an individual owns two separate companies, those companies cannot each claim the full £1 million allowance and must allocate the single allowance between them.

When an asset previously claimed under the AIA is sold, the proceeds from the sale may need to be brought into account for tax purposes. This can result in a “balancing charge,” where the sale amount is added to the business’s taxable profits. This recaptures the tax relief that was initially granted if the asset is sold for more than its written-down value.

How to Claim the Allowance

The AIA is claimed on the business’s annual tax return filing. The claim is made on the CT600 Corporation Tax return for incorporated businesses, or on the Self Assessment tax return for sole traders and partnerships. The claim must be made in the tax period in which the asset was purchased.

To make the claim, you must calculate the total cost of all qualifying assets purchased during the accounting period. This total figure, up to the £1 million limit, is then entered into the designated capital allowances section of the tax return. You must maintain records of the purchases to support the claim.

The amount claimed as AIA is deducted from the business’s profits, which reduces the overall taxable profit. If the total qualifying expenditure in a year exceeds the AIA limit, the excess amount can still be eligible for tax relief through writing-down allowances. These allow a portion of the remaining cost to be deducted over subsequent years.