The 2019 Annual Investment Allowance Increase
The Annual Investment Allowance (AIA) offers tax relief to businesses that need to purchase business equipment. It allows your business to deduct the total amount spent on qualifying equipment from your taxable profits in the same tax year.
AIA can be adjusted each year with the new Budget. In 2019, the AIA received its most significant boost yet.
Starting January 1, 2019, the AIA is £1 million, up from £200,000 in previous years. The £1 million figure remains in place until December 31, 2020, giving businesses two years of the increased limit.
What does the AIA increase mean for your business? Keep reading to learn more about AIA limits and rates.
Why Does the Annual Investment Allowances (AIA) Exist?
The AIA encourages businesses to invest and by spending money on qualifying equipment, companies lower their tax burden while also improving their operational capacity.
Each year, the Exchequer releases the new AIA rates as part of the budget. Recently, it has not grown above the current level of £200,00. However, in 2018, the Budget has provided temporary AIA increase to £1 million for tax years 2019 and 2020.
On January 21, 2021, the AIA will transition back to the original current level of £200,000.
The change will directly impact businesses that spend more than the previous £200,000 threshold on plant and machinery. HMRC says that 30,000 UK businesses currently exceed the £200,000 limit each year. However, this figure represents only three percent of companies.
Why Such a Dramatic Increase?
The rationale behind the move to increase the AIA to £1 million is clear. The UK’s pending departure from the EU created a period of economic uncertainty across the UK business landscape.
With businesses uneasy about spending or thinking about moving operations, the tax break is an incentive not only to continue but also ramp up spending and investment.
If it can get businesses to bite, then it encourages firms to avoid postponing major investment decisions and provide a stimulus to the economy.
Are There Potential Drawbacks?
Only around three percent of UK businesses benefit from temporary AIA increase. For the vast majority of firms, the transitional increase comes with complications, primarily in the timing of their spending.
In essence, businesses ready to spend early and consistently will make the most of the limit. Those who need to gather capital to make the purchases could miss out by spending too late thereby leaving them out in the cold by encouraging spending without the promised tax incentives.
We’ll share more about timing and transitional rules in the next section.
AIA Basics: What Businesses Need to Know
Are you new to the AIA and wondering whether your business may participate? Here’s what all UK businesses should know about this tax credit.
Who Can Claim AIA?
The AIA is available for limited companies as well as individuals or sole proprietors and partnerships.
What Can I Buy with the AIA?
The AIA allows you to write off most assets purchased to run your business. From printers to vans to diggers and lorries, almost all mechanical purchases count.
You cannot, however, use the AIA to write off company cars. Those are covered under exceptions to the rule.
What Are the Exceptions to the AIA?
As mentioned, cars are not subject to tax relief. You also cannot claim items you already owned and used for other reasons before employing them for business purposes.
For example, if you already owned a desktop computer for personal use and you make it your dedicated business computer, then you cannot claim it under the AIA.
You also may not deduct the value of items given to you. If you received a computer as part of a local grant, you can’t count the cost of the item.
However, these items are still of value to you. You’ll use the method known as writing down allowances when the item doesn’t qualify for the AIA calculation.
Writing down allowances means deducting a percentage of the value of the non-AIA item from your profits. You could write down an item even if it was a gift. Instead of relying on the purchase value, you write down the market value (how much you can sell it for).
How Can I Make the Most of the Transitional Limits?
Timing your expenditure will help qualifying businesses make the most of the new limits. Indeed, the restrictions written into the Finance Bill 2019 provisions mean that you need to spread your spending carefully.
For example, if you maximise your expenditure from April to December 2020, you would have an effective allowance of up to £800,000.
However, if you spend the same amount between January 1 and March 31 2021 (the end of the 2020 tax year for some businesses), then you receive only £50,000, or the first few months of the £200,000.
The issue becomes even more problematic for businesses with tax years ending earlier in 2021.
Do You Have Questions About the AIA?
With economic uncertainty predicted to be a defining trend of the new few years, the UK government is keen to encourage businesses to keep spending and avoid further damage to the economy.
The temporary increase in the Annual Investment Allowance (AIA) from £200,000 to £1 million will benefit three percent of UK businesses whose spending outstripped the previous limit.
However, the other 97 percent of businesses need to carefully plan if they want to take advantage of the credit. Careful timing is the key to making sure you make the most of the AIA without damaging your cash flow.