What is the Annual Investment Allowance (AIA)?
Introduced in 2008, the AIA allows a 100% tax-free allowance for qualifying plant, machinery and office expenditure incurred in an accounting period up to a specified annual amount each year. It is a key tax planning tool for any business, facilitating expansion and development.
How much is the Annual Investment Allowance?
Currently, it is at £1 million. This will reduce to just £200,000 on 1 January 2022.
Up until 31 December 2018, AIA was capped at just £200,000 per year. This limit was temporarily increased to £1 million per year for each of the following two years, due to end on 31 December 2020. This will now be extended to 31 December 23021. As of 1 January 2022, the AIA limit will revert back to £200,000.
There are transitional rules in place to deal with the reduction in AIA. However, if 31 December 2021 falls in the middle of your accounting period, you could lose allowances. Therefore, the timing of the purchase is important.
How does the Annual Investment Allowance work?
If your business has a 31 December 2021 year-end, the relief is straightforward. However, if your business has a year-end which spans 1 January 2022, transitional rules will apply and the AIA entitlement before and after 1 January is:
A) Based on the £1,000,000 allowance pre 1 January 2022, apportioned for the number of months making up the accounting period falling before 1 January 2022.
B) Based on the £200,000 allowance post 1 January 2022, apportioned for the number of months making up the accounting period falling after 1 January 2022.
A + B are then added together to calculate the maximum potential AIA for the accounting period subject to the transitional rules.
For example, if your business has a 31 March 2022 year-end, your AIA entitlement would be as follows:
A) £1,000,000 x 9 months = £750,000 (1 April 2021 – 31 December 2021)
B) £200,000 x 3 months = £50,000 (1 January 2022 – 31 March 2022)
A + B = Maximum potential AIA = £800,000
How can the AIA become complicated?
In addition to the above, the actual AIA claim is also determined by the date on which the expenditure is incurred (when you paid for the item). There is a further cap when the limit reduces. It restricts the AIA limit to the proportion of the AIA in that part of the accounting period.
In the above example, if the business purchased an item of machinery costing £400,000 on 30 September 2021, and then another costing £400,000 on 28 February 2022, it could appear that the total allowable expenditure of £800,000 would qualify for AIA at 100%.
However, the second item of machinery was purchased in the period after 31 December 2021. This means that the claim for that period is restricted to the AIA limit applying to 1 January 2022 – 31 March 2022 i.e. £50,000.
Therefore the AIA claim for the period is £450,000, (£400,000 for the first machine and £50,000 for the second). The remaining £350,000 of expenditure will qualify for Capital Allowances at the standard rate of 18%. If both pieces of machinery had been purchased before 31 December 2021, the maximum AIA of £800,000 could have been claimed.
If you are thinking about purchasing ‘plant and machinery’ it is crucial that you make these purchases as soon as possible. It’s critical to get the most benefit from the AIA being at an increased rate of £1 million.
Can you claim AIA on purchases made on hire purchase agreements?
Purchasing an asset on hire purchase makes things more complicated. In these circumstances, AIA cannot be claimed on payments until the asset is ‘brought into use’. Hire purchase usually means that you do not technically own the machinery until a significant payment is made at the end of the contract, to purchase the asset.
You should speak with a tax advisor before making a significant purchase, especially on a Hire Purchase agreement.
What can you claim Annual Investment Allowance on?
You are able to claim allowances on items that you ‘keep to use in your business’. These items are classed as ‘plant and machinery’ and include:
- items that you keep to use in your business, including cars
- costs of demolishing plant and machinery
- parts of a building considered integral, known as ‘integral features’
- some fixtures, for example, fitted kitchens or bathroom suites
- alterations to a building to install other plant and machinery – this does not include repairs
Find the full list of items you can claim under your AIA on the UK Government website.
We can help your business buy machinery in a tax-efficient way
If you are unsure of your limits or would like further advice on how to best utilise your AIA fully, please get in touch. You can contact your usual Ellacotts contact or our Tax Team on solutions@ellacotts.co.uk or 01295 250401.
We help businesses and individuals with tax issues, advice and can identify tax planning opportunities. Our tax experts can help you to minimise your tax liabilities by using reliefs such as the Annual Investment Allowance and more. Contact us here for more information on how we can help you.
January 2021 changes to the AIA
In a positive move, the Government has announced that the current Annual Investment Allowance (AIA) of £1,000,000, which was due to revert down to £200,000 on 1 January 2021, will be extended for a further year to 1 January 2022.
The change, in response to the effects Covid-19, means that businesses will continue to benefit from 100% upfront tax relief on the first £1,000,000 of Capital Allowances identified, encouraging investment on property purchases, developments and refurbishments over the next 12 months.
Find out more about how we help business owners with tax planning advice.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
