This guide deals with items that qualify for annual investment allowance. Find out how to deduct the full value of those that qualify for AIA from business profits before paying tax.
AIA RULES: Selling an item after claiming annual investment allowance means you may need to pay tax on it.
The rules for annual investment allowance changed on the 1st of January 2016. It means most plant and machinery qualifies up to the current AIA amount.
There are several things you cannot claim annual investment allowance on such as:
Note: You should claim writing down allowances for these items instead of AIA.
The AIA amount temporarily increased to £1 million between the 1st of January 2019 and 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. Read 'limit changes during accounting periods' for more detail.
Note: As a rule, you will get a new allowance for each accounting period.
You will need to adjust the AIA for an accounting period more or less than 12 months. For example an accounting period of 9 months would be 9/12 of the AIA limit.
Thus, 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.
Different rules apply to an accounting period which is longer than 18 months. Having a gap or an overlap between accounting periods also gets affected.
You cannot claim AIA outside the accounting period that you bought the item. For the purpose of capital allowance rules and procedures the date you bought the item would be:
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. 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 is better to make a claim for:
As a sole trader (or partner) using the item outside of the business as well means you cannot claim the full value. You must reduce the capital allowances you claim. The reduction should equal the amount you use the asset away from the business.
An Example: Your business needs a laptop and you buy one that costs 400. Let's say you use the laptop outside the business for half of the time. Thus, the capital allowances amount you can claim gets reduced 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 to buying an asset that qualifies for the first year allowances. You will 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 as well.
There is a special type of first year allowance called 'enhanced capital allowances'. They relate to certain energy and water efficient types of equipment. Thus, if the item qualifies you may be able to claim for:
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.
Claim Capital Allowances: Understand the rules and procedures of claiming capital allowance relief.
What You Can Claim AIA On: A list of plant and machinery and other items that qualify for AIA.
Company Cars: Check how to claim capital allowances on cars bought and used by the business.
How to Claim AIA: Working out capital allowances and then claiming it using one of the methods.
Annual Investment Allowance Rules for United Kingdom