Annual Investment Allowance (AIA): What It Is?

KEY TAKEAWAYS

• For the acquisition of commercial equipment, British firms are eligible for tax relief under the Annual Investment Allowance (AIA).
• Companies, partnerships, and single proprietorships can all make claims under the AIA.
• The majority of assets bought for commercial use are eligible for the AIA.

What Is the Annual Investment Allowance (AIA)?

The Annual Investment Allowance (AIA) is a type of tax break available to British companies. It is intended to be used for capital asset purchases. According to the AIA, a company may deduct from its profits before tax for a given tax year. You may be able to deduct a part, or  entire amount, of eligible capital expenditures. This budget line item is designated for the purchase of office supplies, mainly tools and machines.

The Annual Investment Allowance (AIA) was implemented in 2008 as a way to motivate companies to spend money on equipment and plant in an effort to boost the economy. The allowance’s ability to assist in quicker tax relief by allowing the full expense to be claimed in the year of purchase rather than over a number of years.

Eligibility for the Annual Investment Allowance

The allowance is available to both businesses and sole proprietors. If all partners are individuals, partnerships are also eligible for the AIA. Unless the firms operate on the same premises and/or engage in similar activities, a single proprietor or partner with multiple enterprises often qualifies for the Annual Investment Allowance for each business. 

When the same person controls two or more limited companies, those firms are each only entitled to one AIA and may decide how to divide it among themselves.

What Can Be Claimed on the AIA? 

The majority of assets bought for business use can be claimed as AIA-qualifying costs, with the main categories being as follows:

• Office supplies, such as furniture and various types of software and hardware for computers
• Building components known as vital features
• Some items, like air conditioning, complete kitchens, or bathroom fittings
• Vehicles used for moving, such as lorries or vans
• Machines employed in the workplace
• Tractor-related equipment used in agriculture
• Equipment that is employed to provide entertainment, like arcade games

Buildings, automobiles, property, structures like docks or bridges, and objects used just for business enjoyment are assets that cannot be claimed. It is possible to deduct a portion of the cost of vehicles used for business activities, but not as part of the AIA. The cars used by driving schools are the only exception to this regulation, as they must be modified to include dual controls and as such may be claimed under AIA.

HM Revenue & Customs (HMRC) provides comprehensive instructions in the Capital Allowances for Plant and Machinery Toolkit for claiming the Annual Investment Allowance.

What Cannot Be Claimed on the AIA?  

You cannot make an AIA claim on:

• Business purpose vehicles
• Things you previously held for a different purpose before using them in your business
• Things provided to you or your company for a business purpose

Instead, you might submit a writing-down allowance claim.

Who Can Claim AIA?

Sole proprietors, limited businesses, and partnerships can all claim AIA. If you operate as a sole proprietor, you may utilize it to pay for business-related equipment purchases. It resembles a capital allowance.
When determining your profit and the amount of tax you must pay on it, you can deduct 100% of the cost of any equipment you purchase that is eligible for the AIA. Tools and machinery are the type of equipment that are typically covered by the AIA.

What Is the Limit for AIA?

In his Spring Statement on March 23, 2022, then-Chancellor Rishi Sunak stated that he was searching for innovative ways to maximize the advantages provided by Capital Allowances.
The temporary increase  of the Annual Investment Allowance (AIA) to £1 million from January 1, 2019 to March 31, 2023, aims to build on the momentum started by the super deduction. The super deduction allows you to deduct up to 130% of the cost of plant and machinery from your taxable profits.

Summary

The AIA is a tool and equipment allowance that lets a business deduct 100% of eligible capital expenditures, up to a predetermined limit, from its taxable profits for the same period. Businesses are encouraged to invest thanks to AIA, which also streamlines tax relief so that it may all be claimed in the year of investment rather than over a number of years, improving a company’s cash flow.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

Written by Sandra Habiger, CPA

Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.