What can AIA be claimed on?
Plant and Machinery
This category includes machinery, equipment, vehicles, and tools used for business purposes. It covers both new and used assets.
Fixtures and Integral Features
AIA can be claimed on fixtures and features that are considered integral to a building, such as heating, air conditioning, and lighting systems.
Renovations and Alterations
Certain renovation and alteration costs can be included in AIA claims, provided they meet the qualifying criteria.
Some Building Works
AIA may apply to building works in certain cases, such as when they are part of a qualifying expenditure on plant and machinery.
Who can claim AIA?
Businesses of any size that are subject to UK corporation tax or income tax can claim AIA.
This includes self-employed individuals, partnerships (where all the members are individuals), and limited companies.
What is the limit?
The Annual Investment Allowance limit has varied over the years. The limit has been £1 million since 1 January 2019, and in the last budget, it was announced that the level of AIA was to be kept at £1m for the foreseeable future. This means that businesses can claim up to £1 million of qualifying capital expenditures as a deduction from their taxable profits in a given accounting period.
If an accounting period is shorter than 12 months the AIA is adjusted accordingly (for example a nine months accounting period would mean an available AIA of 9/12 x £1 million = £750,000).
Is there a time limit to claim AIA?
AIA can be claimed for qualifying capital expenditures made within the accounting period in which the business incurs the expense. There is an exception for pre-trading expenditure, but it is important to ensure that the purchases fall within the correct accounting period to be eligible for the AIA claim.
Can AIA be carried forward or carried back?
No, AIA cannot be carried forward to future accounting periods, nor can it be carried back to previous periods. Any unused AIA for a specific accounting period is lost, so businesses need to plan their investments accordingly to maximise their AIA claims.
Are there any assets excluded from AIA claims?
Yes, certain assets are excluded from AIA claims. These typically include assets that are not used for business purposes, such as assets used privately or for non-business activities. Additionally, cars, items owned for leasing, and assets acquired from connected parties are generally not eligible for AIA.
Can I see an example of how it works?
Suppose a small manufacturing company purchases new machinery for £700,000 during its accounting period. The AIA limit is set at £1 million for that period.
The company can claim the full £700,000 as AIA, which means the entire amount can be deducted from its taxable profits. If the company had taxable profits of £2 million before claiming AIA, the taxable profits would be reduced to £1.3 million (£2 million – £700,000). Assuming a corporation tax rate of 19%, the company’s tax liability would be reduced by £133,000 (£700,000 x 19%) due to the AIA claim. If tax is paid at a higher rate due to the recent increase in the corporation tax rate, then savings will also be higher.
How does AIA interact with other capital allowances?
AIA is part of the capital allowance system.
When a business claims AIA on qualifying assets, the remaining balance of the expenditure in accounting periods ending after 31 March 2023 is now likely to qualify for a new allowance called Full Expensing (FE), which applies to main/general pool items only. There is no upper limit to claiming FE. There is also a 50% first-year allowance for special rate pool items that also interact with AIA.
For accounting periods before 1 April 2023, amounts that exceed the AIA limit would potentially be available for super-deduction for main/general pool items, or first-year allowance for special rate pool items, or may only be eligible for writing down allowances (WDAs) at the main rate (18%) or special rate (6%).
Are there any specific rules for connected businesses and AIA claims?
Yes, special rules apply when connected businesses (e.g., companies with common ownership) are involved.
The combined AIA claim of connected businesses is subject to a cap, which prevents businesses from attempting to claim multiple AIA allowances for the same expenditure. This rule also applies if you are a sole trader or a partnership and you have more than one business or trade controlled by the same person, are on the same premises, and have similar activities.
Is there a limit to the amount of AIA claims a business can make in a year?
As long as the total value of qualifying capital expenditures did not exceed the AIA limit of £1 million, businesses could make multiple claims within their accounting period for as long as a tax return remains open for amendment.
What happens if a business exceeds the AIA limit?
If a business’s qualifying capital expenditure exceeds the AIA limit for a specific accounting period, the excess amount is not eligible for AIA. Instead, Full Expensing (FE) for main/general pool items is likely to apply in accounting periods ended after 31 March 2023, and First Year Allowance (FYA) for special rate pool items may also apply. For expenditure in accounting periods before 1 April 2023 super-deduction for main/general pool and FYA for special rate pool may apply, otherwise, it is added to the business’s main pool or special rate pool (depending on the asset type) for claiming writing down allowances (WDAs) at the prescribed rates of 18% and 6%.
Is AIA available for assets leased or rented to others?
AIA can be claimed on assets used for leasing or renting to others if the business itself incurs qualifying capital expenditure on those assets.
Can AIA be claimed on second-hand assets?
Yes, AIA can be claimed on both new and second-hand assets, as long as they meet the qualifying criteria. This means businesses can benefit from AIA when purchasing used equipment, machinery, or other qualifying assets.
What happens if a business makes disposals of assets for which it claimed AIA?
If a business disposes of assets for which it previously claimed AIA, the amount of AIA previously claimed is added back to the business’s taxable profits in the year of disposal. This is known as a “balancing charge.” The business may need to pay tax on the balancing charge amount at the appropriate rate.
A balancing charge would not apply to capital allowances claimed against Land & Buildings costs where a Section 198 Election is administered retaining all capital allowances (or no claimed capital allowances have been transferred to the buyer). Often the opposite is generated in that a balancing allowance is made available.
Learn more about balancing charges & balancing allowances.
Are there any sector-specific rules for AIA claims?
In most cases, AIA is available to businesses across all sectors. However, some specific assets or trades may have special rules or restrictions for claiming AIA, and businesses should seek guidance if they have any doubts.
Can partnerships share the AIA limit?
Partnerships are not considered separate entities for tax purposes, and their AIA limit is shared among the partners. The partners’ share of the AIA limit may depend on their profit-sharing ratio in the partnership. Partnerships are only entitled to AIA if all their members are individuals.
Can a company claim AIA if it has made losses in the accounting period?
Yes, if a company has made losses in the accounting period, it can still claim AIA and the allowance will be used to reduce the losses. Any remaining AIA not used to offset losses can be carried forward to future accounting periods.
Why It's Important to Lean on Expert Advice
Navigating the complexities of tax reliefs, such as the AIA, can be challenging for businesses
As we have seen, AIA rules and regulations are subject to change, and various legislation exists that could impact a company’s eligibility and tax savings. This is where leaning on expert advice becomes crucial. Seeking guidance from tax advisors who specialise in this area can provide businesses with invaluable insights. These experts stay up-to-date with the latest tax laws and changes, ensuring that businesses make accurate AIA claims and optimise their tax relief. By consulting experts, businesses can not only minimise the risk of errors or non-compliance but also make informed decisions about their investments and financial strategies.
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