Claiming AIA is an ideal way for corporations, partnerships, and sole proprietors to reduce their tax liabilities on items that qualify for the scheme.
The information in this guide explains how to deduct the full value of qualifying items (e.g. plant and machinery) from business profits before paying tax.
The AIA tax relief scheme only covers certain types of business purchases. Some of the common items that you cannot claim include:
Note: You should claim writing down allowances instead on items that do not qualify for the Annual Investment Allowance (AIA).
The UK rules for Annual Investment Allowance changed on the 1st of January 2016. As a result, most plant and machinery now qualifies (up to the current AIA amount).
Even so, the rules around capital allowances when you sell an asset mean that selling an item after claiming the allowance will most likely create some tax liabilities.
HM Revenue and Customs (HMRC) announced a temporary increase in the Annual Investment Allowance. The increase to £1 million applies between the 1st of January 2019 and the 31st of December 2020.
The AIA amount changed several times between 2008 and 2016. So, if it changed in the period of your claim you need to adjust the amount.
You need to follow the special rules if the maximum amount of Annual Investment Allowance changes during the actual period for which you draw up your accounts.
Note: Each accounting period will receive a new allowance.
You will need to adjust the AIA for an accounting period if it is more or less than twelve (12) months. Thus, an accounting period of nine (9) months would be 9/12 of the AIA limit.
The calculation would be 75% of £200,000 (e.g. £150,000). There could also be other changes to the AIA in that accounting period to consider.
Note: Different rules apply to an accounting period which is longer than eighteen (18) months. Having a gap or an overlap between accounting periods would also be affected.
You cannot claim AIA outside the actual accounting period of when you bought the item. So, for the purpose of capital allowance rules and procedures, the date you bought the item would be when (either):
If you buy any assets under a hire purchase contract you may claim once you start using the asset. That means you can claim even before you finish all the hire purchase payments. But, the rules do not allow you to claim on the interest installments.
Note: There are a few special rules on capital allowances when selling an asset. For instance, you cannot apply AIA on items bought in the final accounting period if the business is closing down.
There may be a reason why you prefer not to claim the full cost that you can get. A typical example is if the business has low profits. In cases like these, it may be better to make a claim for:
In this case, you would need to reduce the capital allowances that you are claiming. The reduction should equal the amount that you are using the asset away from the business.
Your business needs a laptop and you buy one that costs £400. Let's say you use the laptop outside of the business for half of the time. Thus, the capital allowances amount you can claim reduces by 50%.
You should claim writing down allowances any time you go above the AIA limit. What if a single asset takes you over the AIA amount? In this case, split the value between the different types of allowance.
As a rule, a mixed partnership is one where a partner is either a company or involved in another partnership. AIA is not available for these types of mixed partnerships.
A self-employed sole proprietor or a partner can have more than one business or trade. In cases such as these, each business will usually get the AIA. But, only one AIA is available if the businesses are:
Two or more limited companies sometimes get controlled by the same person. In this case, they would get one AIA between all the companies. Even so, they get to choose how to divide the share of the AIA.
Special rules apply when buying an asset that qualifies for the first year allowances. If so, you would be able to deduct the full cost from the business profits before tax.
Note: First year allowances do not count towards the AIA limit. That means you may claim for them and claim for the Annual Investment Allowance (AIA) as well.
There is a special type of first year allowance defined as 'enhanced capital allowances'. In the main, they relate to certain energy and water efficient types of equipment.
Thus, providing the item qualifies, you would be able to claim for things like:
Note: As a rule, you will not be able to claim on items a business buys to lease out to other people or to use in a home it lets out. You may choose not to claim all the first year allowances you have entitlement to. Thus, use the written-down value to claim part of the cost in the next accounting period.
Capital Allowances AIA Guide for the United Kingdom