What is the Annual Investment Allowance (AIA)?
The AIA is the type of capital allowance that offers a 100% allowance on qualifying capital expenditure in the year of purchase. It is available to businesses regardless of their size.
Why has it changed?
In his budget statement of the 19th March 2014, the Chancellor announced that the AIA limit would increase from £250,000 to £500,000 per annum with effect from 6th April 2014 for sole traders / partnerships. The limit was due to revert to £25,000 with effect from the 1st January 2016 but the Chancellor confirmed in the March 2015 budget that the allowance would not be falling to £25,000 but set at a more generous level. The revised limit was set at a permanent level of 3200,000 from 1st January 2016.
Who can claim?
Almost any business whether chargeable to corporation tax or income tax is eligible for the AIA. However one example of a business structure that cannot claim the AIA is a mixed partnership (for example, a partnership comprised of both individuals and companies) and also trusts.
How does AIA benefit my business?
The main advantage of AIA is that it accelerates the timing of tax relief on qualifying capital expenditure. The timing of investment is critical particularly when the maximum AIA limit is being set permanently at £200,000 with effect from the 1st January 2016. Businesses planning to make capital expenditure over the coming year should consider accelerating such expenditure in order to maximise their AIA.
Are there any limitations?
Where the chargeable accounting period of the business is more or less than a year, the maximum AIA is proportionately increased or reduced.
Also, where a business’s accounting period straddles a date of change of the AIA limits for example 31st December 2015, there is an impact on the maximum AIA available to the business in that accounting period. In calculating the AIA available to the business, the accounting period is divided into separate notional periods straddling the date of change and the AIA limits are time apportioned to arrive at an annual AIA limit. In each notional period, the prevailing AIA limit without apportionment cannot be exceeded.
What happens after 1st January 2016?
The chancellor finally announced in the July 2015 budget that the permanent level of maximum AIA will set as £200,000 with effect from 1st January 2016. This is a significant drop from the current temporary maximum AIA limit of £500,000 which is now set to end on 31st December 2015. Businesses planning to invest in excess of £200,000 of qualifying expenditure should consider bringing forward their plans where possible in order to maximise their AIA.
How do I claim?
For qualifying expenditure incurred in the period to 31st December 2015, the first £500,000 of expenditure per annum is 100% allowable effectively as a deduction in calculating the taxable profits of the business. Any excess qualifying expenditure is dealt with under the normal capital allowances regime attracting 18% or 8% annual Writing Down Allowance (WDA) in the first year and the balance going into a pool of allowances for subsequent years.
Important additional points to consider
The timing of an investment can be critical. Equipment bought on or after the 1st January 2016 will be subject to the reduced AIA limit of 3200,000 as announced in the July 2015 budget.
The AIA limit for accounting period ending between 1st April 2015 and 31st December 2015 will be £500,000. But, where a business has an accounting period which straddles 31st December 2015, or is for a period other than a year, a calculation of the limit needs to be performed. If, for example your accounting year ends on 30th June 2016, you need to split the accounting period (for AIA purposes only) into two periods.