Capital allowances can be claimed when a business buys assets to be used in the business. As the asset is used for business purpose and would lose its value for wear & tear, therefore, the value of the asset can be deducted from profits before paying tax. However, there are different rules for different assets and various schemes available for the businessman.
Annual Investment Allowance or AIA is one of the ways to claim tax relief on assets that the business purchases. It is a 100% upfront allowance which applies to qualifying expenditure up to a specific annual limit. If a business spends more than the annual limit, any additional expenditure will attract relief under the normal capital allowance procedure, entering either main pool or the special rate pool and will attract writing down allowance at the respective rates.
If the asset bought qualifies for AIA 100% of the cost of the asset can be deducted from a business’s profits before working out how much tax is due on that profit.
Annual Investment Allowance is claimed as part of the tax return, while the accounts would be prepared on accounting principles and would claim for depreciation only.
HMRC sets a limit for how much AIA can be claimed in a tax year.
For assets bought after 1st January 2019, the AIA limit is £1,000,000 which has temporarily been increased from £200,000. This revised limit is expected to last for two years after which it would be reverted back to £200,000.
It is frequently asked whether all assets qualify for AIA, the answer to which is NO, all assets are not eligible for AIA. The most common example of non-qualifying assets is motor cars or assets used for something else before being brought into the business. These non-qualifying assets will qualify for capital allowances spread over several years rather than the full cost at the date of purchase which is what AIA gives.
While AIA is a way of claiming tax relief on assets, the assets would still have to be recognized at their full amount in the statement of financial position and would be depreciated over their useful life.
AIA exists to give relief to businesses, especially the new startups when they buy the assets for business claim AIA which reduces their tax liability. Please note that the reduction in tax liability is only temporary as in future years you cannot claim anything for the part of the asset already claimed under AIA.
Capital Expenditures that qualify for the AIA:
Most assets purchased for business purposes can be claimed as qualifying expenses for AIA, with the primary categories as listed below:
- Office equipment including computer hardware and certain types of software, and office furniture
- Parts of a building referred to as integral features
- Certain fixtures, such as air conditioning, fitted kitchens, or bathroom fittings
- Lorries or vans used for moving purposes
- Machines used for business purposes
- Agricultural machinery including tractors
- Machines used for providing entertainment, such as arcade game machines
Assets that do not qualify for AIA include
- Land or structures
- Bridges or docks
- Items used solely for business entertainment.
The AIA can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non-residential property business or a Furnished Holiday Lettings (FHLs). Partnerships or trusts with individuals and companies in the business structure do not qualify for the AIA.