Annual Investment Allowance (“AIA”) Print

AIAs may be claimed in respect of expenditure on plant & machinery (other than cars). The AIA claimable is 100% of the cost of the plant and machinery. The amount of expenditure on which the AIA may be claimed has fluctuated over the years since its introduction, and from January 2016 the upper limit was made permanent at £200,000. The government initially increased the upper limit to £1,000,000 for a 2-year period in relation to qualifying expenditure incurred on or after 1 January 2019 up to 31 December 2020. In the Budget on 3 March 2021 it was announced that the upper limit of £1,000,000 is being extended for a further year, and will now expire on 31 December 2021.Thereafter, it is expected that the upper limit will revert back to £200,000 for expenditure incurred on or after 1 January 2022.

The following table shows the changes to the upper limit and the operative dates since April 2014:

Year Upper Limit, £
From April 2014 to 31 December 2015 500,000
From 1 January 2016 to 31 December 2018 200,000
From 1 January 2019 to 31 December 2020 1,000,000
From 1 January 2021 200,000

The AIA is particularly beneficial for small businesses, as in many cases the annual allowance will be sufficient to cover most, if not all of the capital expenditure on qualifying plant and machinery. For larger businesses, this relief is of less significance.

If the qualifying expenditure exceeds the upper limit then AIA may be claimed on the expenditure up to the limit, and the balance is included in the General Pool, or Special Rate Pool on which Writing Down Allowances (“WDA”) may be claimed.

The claimant can decide which expenditure should be allocated to the AIA claim to maximise the relief due. It is more advantageous to claim AIAs on expenditure which would otherwise fall into the Special Rate Pool in priority to assets within the General Pool.

For businesses with accounting periods which straddle the date on which there is a change to the upper limit, the upper limit is pro-rated between the 2 periods to arrive at a hybrid upper limit for that year.

Example:

A company whose year-end is 31 March 2019 is entitled to claim AIA on expenditure incurred up to the following limits:

£
Period 1 April 2018 to 31 December 2018 £200,000 x 9/12 150,000
Period 1 January 2019 to 31 March 2019 £1,000,000 x 3/12 250,000
Maximum AIA claimable for the year ending 31 March 2019 400,000

The transitional provisions restrict the amount that can be claimed in the first period to the upper limit for that period, so in the above example the maximum expenditure that qualifies for AIA during the period 1 April 2018 to 31 December 2018 is £200,000. If no expenditure had been incurred during that period, then the whole of the hybrid upper limit of £400,000 would qualify for AIA if the expenditure is incurred during the period from 1 January 2019 to 31 March 2019.

Continuing with the above example, for the company’s financial year ending 31 March 2022, its hybrid upper limit will be:

£
Period 1 April 2021 to 31 December 2021 £1,000,000 x 9/12 750,000
Period 1 January 2022 to 31 March 2022 £200,000 x 3/12 50,000
Maximum AIA claimable for the year ending 31 March 2022 800,000

For this period, the transitional provisions restrict the amount that may be claimed in the second period to £50,000. If no expenditure is incurred during this second period, then the whole of the upper limit of £800,000 may be claimed against expenditure incurred in the period from 1 April 2021 to 31 December 2021.

Where an accounting period is either shortened or extended, the AIA upper limit is adjusted on a pro-rata basis.

It is not necessary to claim the full amount of AIA available, and there may be reasons why a claim for AIA is restricted, or no claim is made. For instance, the trader may be an individual who has only made a small profit for the year and does not want to claim the allowances which would only have the effect of replacing his personal allowance, or other reliefs.

There is a restriction to the amount of AIA which may be claimed by the same person. Where that person controls two or more businesses or companies and at the end of the chargeable period ending in the relevant tax year the businesses are regarded as related if:

The businesses are conducted from shared premises, or

The greater proportion (over 50%) of their activities falls within the same EU classification of economic activities;

Where businesses are related only one AIA is claimable between them.

The amount of AIA may be allocated to each business as the proprietor may determine to his best advantage. This anti-avoidance provision is designed to deter the fragmentation of businesses for tax purposes.

The above restriction to related businesses is applied to businesses and companies separately. If an individual controls two businesses which are related and one company, the two businesses will be entitled to share one AIA between them, and the company will also be entitled to claim AIA in its own right.

AIA is not claimable by an LLP where the LLP has a corporate member.

Property loss relief attributable to AIA may not offset against general income.

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