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What is the annual investment allowance?

What is it?

Previously many businesses would have bought new equipment and had the cost of this offset against tax in a depreciating manner. Historically, for some purchases, 100% of the cost could be offset in the first year, but typically it was 40% or 50% in year one and then 25% on a reducing balance for subsequent years. This was known as FYA (first year allowances). But FYAs have now been replaced with the Annual Investment Allowance (AIA) under legislation which came into effect on 1 April 2008 for companies and 6 April 2008 for other businesses such as sole traders or partnerships.

Who is eligible?

The AIA It is a flat rate allowance which replaces the phased allowances previously used. Virtually every entity will be eligible to qualify for the AIA provided the business activity satisfies one or more of the following criteria:

  • Trading
  • Commercial property letting
  • Office or employment
  • Leasing (excluding long funding leasing)

The only business structures which are not eligible to be part of the AIA are mixed partnerships (i.e. partnerships which are comprised of both individuals and companies) and trustees.

How does it work?

As its name suggests this is an annual allowance which is available for up to £100,000 of expenditure each year. A business can spend up to that amount on any capital assets during the qualifying period and be eligible for 100% tax relief on the full cost in the same accounting year. It is also important to note that this pro rates for short or long periods and also for periods that span the operative date being 1 or 6 April 2008.
For smaller businesses and start ups this obviously represents a sizeable amount to finance an IT upgrade or invest in new plant and machinery. However it is important to note that there are assets which would not qualify, and this is rather a grey area.
In addition, any investment in so-called green technologies can be in addition to the £100,000 allowance and would also be eligible for 100% tax relief in the first year. This is known as Enhanced Capital Allowances (ECAs) and again there is a very prescribed set of qualifying technologies – visit www.eca.gov.uk for more information.

What are the exclusions?

Splitting a business with related interests into a group of companies is a well used tax planning strategy. But whilst the individual companies would be eligible for other tax benefits, in the case of AIA, they would only get a single £50,000 allowance across the group. This is also the case for any related non group companies under common control and also any unincorporated businesses under common control.

In this case the definition of "Related" businesses are those that shared the same premises or carried out similar activities (including 50% of turnover) for the accounting period.

The AIA allowance also excludes purchases such as cars (unless they qualify for the ECA rules). Other exclusions include:

  • Expenditure in the period during which the business activity ceases
  • Expenditure caught by anti-avoidance rules

Do I have to claim the allowance?

You do not have to claim the AIA allowance. If you are not generating enough profit to warrant claiming the allowance you can restrict your allowances and claim only what you need to.

Note: maximising and minimising this relief can have long term tax implications that should be discussed with your accountant.

Disclaimer

The content and advice is for information only. Last updated 26.07.2009.

For up to date information and advice, based on your specific circumstances, please contact us.

We cannot be held responsible for actions taken with reference to the content contained on this website.

 


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