Annual Investment Allowance (AIA)
By Charlie Thompson, Tax Consultant
When a business buys capital equipment the cost is deducted in the accounts over several financial years as depreciation. However, depreciation is not deductible when calculating the business’s taxable profits. Instead the business may get tax relief on certain capital expenditure through capital allowances for plant and machinery.
One of the main forms of capital allowance is called the Annual Investment Allowance (“AIA”). AIA gives full tax relief for expenditure incurred by a business on plant and machinery in a period, up to certain limits.
The limit is currently is £1,000,000 per annum and this is due to end on 31 December 2021. From 1 January 2022, the limit becomes £200,000 for a 12 month period. It will stay at this rate until 1 January 2023.
Where a business has an accounting period straddling 31 December 2021, the maximum amount of AIA is based on a time apportionment of the period for which the allowance is £1,000,000 and the period for which the allowance is £200,000.
There is also a sting in the tail as qualifying expenditure on only the apportioned amount of the £200,000 in the period falling after 1 January 2022 will be available.
An Example of AIA
A company has a chargeable period from 1 July 2021 to 30 June 2022, the maximum AIA for this period would be £600,000, being:
the proportion of the period from 1 July 2021 to 31 December 2021, that is, 6/12 x £1,000,000) = £500,000; and
the proportion of the period from 1 January 2022 to 30 June 2022, that is, 6/12 x £200,000 = £100,000
The most AIA due for the whole period is therefore £500,000 + £100,000 = £600,000.
However no more than £100,000 of the company’s actual expenditure in the period from 1 January 2022 to 30 June 2022 would qualify for the AIA. This means that if a machine costing £150,000 was purchased in February 2022, then £50,000 will not qualify for AIA.
Amounts not covered by the AIA can still attract tax relief in the form of writing down allowances, a kind of tax depreciation. Writing down allowance for the general pool (most plant and machinery) is currently 18% and 6% for the special rate pool (integral features, long life assets, partnership assets with private usage).
From 1 April 2021 a new capital allowance was introduced, called the Super Deduction. This will be more advantageous than AIA in most circumstances, however only companies can claim the Super Deduction meaning that it is not available to unincorporated businesses such as sole traders and partnerships/LLPs. There are various other exclusions from the Super Deduction, most notable second hand equipment, although this would still qualify for AIA. In addition, the AIA will be preferable for special rate pool items, even under the Super Deduction.
For businesses which do not qualify for the Super Deduction, and for any business buying items which fall outside the new relief, it may be seen that the amount and timing of expenditure may be critical in determining whether tax relief is obtained for 100% of the cost in year one or potentially only at a rate of 18% (or 6%) per year over a number of years.
Rules around the time at which capital expenditure is treated as incurred for tax purposes can also be complex so careful planning may make a material difference to a business’ overall tax position.
If you would like further information or help to claim capital allowances, please do not hesitate to contact us and a member from our tax advice team will reach out.
