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Annual Investment Allowance (AIA): What It Is?

Updated: November 25, 2022

Businesses are able to deduct 100% of eligible plant and equipment capital costs under the annual investment allowance (AIA), up to a specific level.

Read on as we give you a full breakdown of what exactly the AIA is, what the eligibility is, what can and can’t be claimed, and what the limit is.

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    KEY TAKEAWAYS

    • For the acquisition of commercial equipment, British firms are eligible for tax relief under the Annual Investment Allowance (AIA).
    • Companies, partnerships, and single proprietorships can all make claims under the AIA.
    • The majority of assets bought for commercial use are eligible for the AIA.

    What Is the Annual Investment Allowance (AIA)?

    The Annual Investment Allowance (AIA) is a type of tax break available to British companies. It is intended to be used for equipment purchases. According to the AIA, a company may deduct from its taxable profits for a given tax year. This is up to a specific amount, the entire amount of eligible capital expenditures

    This budget line item is designated for the purchase of office supplies, mainly tools and machines.

    The Annual Investment Allowance (AIA) was implemented in 2008 as a way to motivate companies to spend money on equipment and plant in an effort to boost the economy. The allowance’s ability to assist in quicker tax relief. This is by allowing the full expense to be claimed in the year of purchase rather than over a number of years is one of its key benefits.

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    Eligibility for the Annual Investment Allowance

    The allowance is available to both businesses and sole proprietors. If all partners are people, partnerships are also eligible for the AIA. Unless the firms operate on the same premises and/or engage in similar activities, a single proprietor or partner with multiple enterprises is often qualified for the Annual Investment Allowance for each business. 

    When the same person controls two or more limited companies, those firms are each only entitled to one AIA and may decide how to divide it among themselves.

    On What Can AIA Be Claimed?

    The majority of assets bought for business use can be claimed as AIA-qualifying costs, with the main categories being as follows:

    • Office supplies, such as furniture and various types of software and hardware for computers
    • Building components known as vital features
    • Some items, like air conditioning, complete kitchens, or bathroom fittings
    • Vehicles used for moving, such as lorries or vans
    • Machines employed in the workplace
    • Tractor-related equipment used in agriculture
    • Equipment that is employed to provide entertainment, like arcade games

    Buildings, automobiles, property, structures like docks or bridges, and objects used just for business enjoyment are assets that cannot be claimed.

    It is possible to deduct a portion of the cost of vehicles used for business activities, but not as part of the AIA.

    The cars used by driving schools are the only exception to this regulation, as they must be modified to include dual controls and as such may be claimed under AIA.

    HM Revenue & Customs (HMRC) provides comprehensive instructions in the Capital Allowances for Plant and Machinery Toolkit for claiming the Annual Investment Allowance.

    On What Can AIA Not Be Claimed? 

    You cannot make an AIA claim on:

    • Business purpose vehicles
    • Things you previously held for a different purpose before using them in your business
    • Things provided to you or your company for a business purpose

    Instead, you might submit a writing-down allowance claim.

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    Who Can Claim AIA?

    Sole traders, limited businesses, and partnerships can all claim it. If you operate as a sole proprietor, you may utilize it to pay for business-related equipment purchases. It resembles a capital allowance.

    When determining your profit and the amount of tax you must pay on it, you can deduct 100% of the cost of any equipment you purchase that is eligible for the AIA. Tools and machinery are the kinds of equipment that are typically covered by the AIA.

    What Is the Limit for AIA?

    In his Spring Statement on March 23, 2022, then-Chancellor Rishi Sunak stated that he was searching for innovative ways to maximize the advantages provided by Capital Allowances.
    The changes of the Annual Investment Allowance (AIA) of £1 million to March 31, 2023, aims to build on the momentum started by the Super Deduction.

    Summary

    The AIA is a tool and equipment allowance that lets a business deduct 100% of eligible capital expenditures, up to a predetermined limit, from its taxable profits for the same period.
    Businesses are encouraged to invest thanks to AIA, which also streamlines tax relief so that it may all be claimed in the year of investment rather than over a number of years, improving a company’s cash flow.

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    FAQS on Annual Investment Allowance

    Can the Annual Investment Allowance Be Carried Forward?

    Only during the taxable period in which the qualifying expense is incurred or recognized as incurred may the AIA be claimed. Therefore, any unused portion of an AIA cannot be carried over to a subsequent charged period.

    Is an Annual Investment Allowance a Capital Allowance?

    The Annual Investment Allowance is a mechanism for your firm to obtain tax relief on a variety of assets it will purchase. It resembles a capital allowance.

    How Do You Use the Annual Investment Allowance?

    An item that is eligible for the annual investment allowance may be fully deducted from your profits before taxes. You can be required to pay tax if you sell the item after filing for AIA.

    What Kind of Expenditure Does AIA Cover?

    The Annual Investment Allowance (AlA) offers 100% tax relief for business expenditures made by single proprietors, partnerships, and corporations on plant and machinery.

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