The 2019 Annual Investment Allowance increase

AIA can be adjusted each year with the new Budget. In 2019, the AIA received its most significant boost yet.

Since January 1, 2019, the AIA has been £1,000,000, up from £200,000 in previous years. The £1 million figure remains in place until March 31, 2023, giving businesses four years of the increased limit.

What does the AIA increase mean for your business? Keep reading to learn more from our guide to the 2019 Annual Investment Allowance increase.

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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. In previous years, the level fluctuated from £50,000 to £500,000. However, in 2018, the Budget announced a “temporary” AIA increase to £1 million from 1 January 2019, which has remained in place ever since.

It would appear the AIA threshold is being discussed in preparation for the next budget announcement. As any changes would directly impact businesses that spend significant capital on plant and machinery each year, any changes are carefully considered.

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Why such a dramatic increase?

Originally. the rationale behind the move to increase the AIA to £1 million is clear. The UK’s expected departure from the EU created a period of economic uncertainty across the UK business landscape.

Events that have followed e.g. Covid, have created continued pressure on the need for spending in an attempt to manage and drive a healthy economy.

With the ongoing uncertainty created by Brexit, Covid, and now talks of a recession, businesses may be 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 businesses are given the incentive to spend, it encourages them to avoid postponing major investment decisions, and thus provide a stimulus to the economy.

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Are there potential drawbacks?

The only potential drawback with AIA is that it cannot be claimed retrospectively. It is only claimable in the financial period that the expenditure was incurred.  This makes it important to identify amounts qualifying for AIA in the year that the expenditure is incurred, as if the claim is not made in an open tax return the benefit of the allowance is lost, and expenditure would then only be claimable at the current annual writing down rates of 18% for general pool items, and 6% for special rate items.  The tax advantage of claiming AIA when it is due can be huge.

We’ll share more about timing and transitional rules in the next section.

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AIA basics: What businesses need to know

  • 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. Items embedded within a property can be trickier to identify, however these are often substantial.

    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.

    In the event you exceed the AIA threshold or you haven’t claimed the costs in the year of expenditure, qualifying costs are still of value to you. You’ll use the method known as writing down allowances where it is not possible to claim AIA.

    Writing down allowances means deducting a percentage of the value of the non-AIA item from your profits.

  • How can I make the most of the “temporary” limit?

    As the temporary limit has been in place for a number of years now, it isn’t as crucial (as it was) to carefully time your expenditure. Where it is announced a change is to be made to the threshold, this will trigger the need to think strategically (subject to the changes).

Encouraging businesses to spend

With economic uncertainty predicted to be a defining trend of the next few years, the UK government is keen to encourage businesses to keep spending and avoid further damage to the economy.

The increase in the Annual Investment Allowance (AIA) to £1 million has benefited UK businesses whose spending is significant, and previously exceeded previous limits.

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Get in touch to learn more about how this tax relief can benefit your business!

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