The Annual Investment Allowance (AIA) is a capital allowance in the UK, which allows businesses to offset the cost of certain assets, as long as they are newly acquired. This allowance lasts for the first year of ownership and is a measure designed to boost the economy by providing an incentive for businesses to invest in plant or machinery.
The AIA works to directly reduce a business’s income or corporation tax liability for the amount invested in these assets, up to a certain amount. This amount currently stands at £1,000,000 for the period 1 January 2019 to 31 December 2020, at which point it will revert to the usual rate of £200,000, as set out in the Summer Budget 2015.
For the two years covered by the temporary increase, businesses are able to enjoy a tax break for up to £1,000,000 for assets acquired during this time, although businesses do need to be mindful that any accounting period which straddles the dates of the AIA change must be apportioned to calculate the maximum qualifying expenditure.
If a business year ends on, say, 30 April, their available AIA for the year ending 30 April 2021 will be calculated as eight months at £1,000,000 plus four months at £200,000. The business also needs to take into consideration when expenditure is incurred in order to receive the full allowance, as any expenditure after 31 December 2020 will revert back to the lower rate.
For this reason it makes sense for businesses to ensure that they pay for assets before 1 January 2021 if they want to take advantage of the current, higher rate.
Who can claim the AIA?
There are various rules as to who can claim the AIA, depending on circumstances. Companies and sole proprietors are entitled to the AIA, as well as partnerships if the partners are individuals.
A member of a partnership or a sole proprietor with more than one business is usually entitled to the allowance for each business, but this may not be the case if the businesses are run from the same premises or are similar enterprises. Where a person owns more than one limited company, they are only entitled to claim one AIA and must decide how to allocate this allowance between the businesses.
The businesses who are entitled to the allowance include:
- Farmers and agricultural businesses
- Growers and food and drink producers
- Healthcare professionals including dentists and doctors
- Laboratories, research and pharmaceutical businesses
- Transport and distribution businesses including couriers
- Shops, hotels, pubs and other leisure businesses.
- Manufacturers, assembly and production businesses
What qualifies for AIA?
AIA can be used to offset the cost of assets, machinery and vehicles amongst others, including:
- Office furniture and equipment
- Building fixtures including air conditioning, kitchens and bathrooms
- Integral features for buildings, including lifts and escalators, hot and cold water systems, lighting systems etc.
- Vans and lorries used for moving items
- Machines used for business purposes including agricultural machinery like tractors
- Entertainment machines, such as arcade game and slot machines
What is not included in AIA?
It is worth checking with HMRC if the assets you are acquiring are eligible for AIA before going through with a purchase, as there are some exceptions. Businesses cannot claim AIA on some types of assets including:
- Buildings and structures such as bridges and docks
- Anything used solely for business entertainment
The way in which an asset is acquired is also a consideration when it comes to eligibility for AIA. Most businesses, especially smaller companies when just starting out, use third party finance loans and leases in order to gain assets.
The annual investment allowance is particular when it comes to the finance that is used in order to expand, in order to qualify for the allowance. Leases, for example, don’t qualify for the allowance, whereas purchases do. So an item gained by lease or hire purchase can be offset with the allowance, but an items obtained via fixed term lease can’t.
Cars and AIA
Cars are the main exclusion from AIA, but there are exceptions to this. Cars which are used for, say, a driving school, are entitled to AIA as they come under machines which are used for business purposes.
Other cars are excluded from the allowance except for new and unused cars with CO2 emissions of less than 75g/km, which receive 100% first year allowances. If cars are not eligible for first year allowances, ‘writing down allowances’ may be given at a rate of 18% if the car is new and CO2 emissions are between 75g/km and 130g/km. This rate may also be given if the car is second hand and CO2 emissions are less than 130g/km.
For all cars where CO2 emissions are more than 130g/km, writing down allowances are given at a rate of 8%.
When to use writing down allowances
You should always use the AIA to deduct the full value of your business assets before tax. But there are situations in which you might need to use writing down allowances instead. A writing down allowance deducts a percentage of the value of the item from your tax bill.
This amount will depend on a variety of factors, such as (as described above) the carbon dioxide emissions on business cars.
You will use writing down allowances for:
- Items which don’t qualify for AIA
- Items which come above the AIA threshold
To claim the writing down allowance you will need to group items into ‘pools’ depending on the rate that they qualify for.
A main pool (includes all plant and machinery that is not included in special rate or single asset pools) of 18%
A special rate pool (includes integral features, building insulation and cars with CO2 emissions of more than 130g/km) of 8%
Single asset pools (short life items or things you use outside of your business) with a rate of either 18% or 8% depending on the item.
You then work out the allowance for each pool and add this to your tax return, alongside your annual investment allowance and other capital allowances.
Any costs you haven’t claimed first year allowances or AIA for can be added to the pool in the following year.
Need help with your capital expenditure?
The annual investment allowance is one of those tax breaks that every company should make use off. The amount saved in tax is essentially a contribution by the government to help you purchase those assets that can help your business grow and grow.
TFMC can help you with how to apply for these benefits correctly as well as assist you with all your accountancy and bookkeeping requirements. Contact us on 0800 470 4820 or email [email protected] to find out more