Annual Investment Allowance (AIA)

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.

What Business Items Don’t Qualify for AIA?

The AIA tax relief scheme only covers certain types of business purchases. Some of the common items that you cannot claim include:

  • Those owned for a different purpose or reason before you started using them in the business.
  • Business cars.
  • Items that have been given to you as a gift (including any that were gifted to the business).

Note: You should claim writing down allowances instead on items that do not qualify for the Annual Investment Allowance (AIA).

Common Items You Can Claim AIA On

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.

Annual Investment Allowance Rates

HM Revenue and Customs (HMRC) announced a temporary increase in the Annual Investment Allowance. The increase to £1 million applies for sole traders, partnerships, and limited companies from the 1st of January 2019 to the 31st of March 2023.

Previous Changes to AIA Amounts

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.

Accounting Period Over or Under 12 Months

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.

An Example:

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.

When to Claim Annual Investment Allowance

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):

  • The payment is due (if it is due more than four months later).
  • You signed the contract (if the payment is due within less than four months).

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.

Claiming for Part of the Full Cost

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:

Using Items Outside of the Business

As a sole trader (or in a business partnership), using the item outside of the company as well means you cannot claim the full value.

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.

An Example:

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%.

Spending over the AIA Amount

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.

AIA Rules on Mixed Partnerships

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.

Multiple Businesses or Trades

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:

  • Both controlled by the same person.
  • Have similar activities or located in the same premises.

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.

HMRC First Year Allowances

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.

Enhanced Capital Allowances

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