The annual investment allowance is a way to claim tax relief on many assets that your business will buy. It is a type of capital allowance.
If your business buys a piece of equipment that qualifies for the annual investment allowance, you can deduct 100% of the cost of that asset from your business’s profit before you work out how much tax is due on that profit.
Annual investment allowance 2021
The government sets a limit for how much annual investment allowance a business can claim in a year, which means that if you buy assets costing more than the limit, you won’t be able to claim annual investment allowance on all your assets. The limit was previously £200,000 but in January 2019 it was temporarily increased to £1,000,000. This new limit will be in effect until 1st January 2022.
If your business is registered for VAT, you claim the annual investment allowance on the total cost of the asset less any VAT you can reclaim on that asset. If your business is not registered for VAT, you claim the annual investment allowance on the total cost of the asset.
What are capital allowances?
Capital allowances let you claim tax relief when you buy assets to keep in your business. They’re a different type of spending to the kind you do on day-to-day running costs.
What if I operate as a sole trader or in a partnership?
If your income is less than £150,000 a year and you’re a sole trader or a partner, you may be able to use the cash basis system instead. Cash basis accounting means you only have to declare money when it comes into or out of your business.
You don’t pay Income Tax on money you didn’t receive in your accounting period.
What can I claim capital allowances for?
According to gov.uk, you can claim for plant and machinery, which includes:
- items that you buy, which stay in your business, including cars
- demolition costs for your plant and machinery
- ‘integral features’ of a building (more on this below)
- some fixtures, including fitted kitchens, bathroom suites, fire alarm and CCTV systems
- alterations to a building to install plant and machinery (but not repairs)
Integral features can include:
- lifts, escalators and moving walkways
- space and water heating systems
- air-conditioning and air cooling systems
- hot and cold water systems (but not toilet and kitchen facilities)
- electrical systems, including lighting systems
- external solar shading
Other capital allowances you can claim include:
- renovating business premises in disadvantaged areas of the UK
- extracting minerals
- research and development
- ‘know-how’ (intellectual property about industrial techniques)
You can claim capital allowances whether you own or rent the building the business operates from. However, you can only claim for items you bought.
If you buy your premises from a previous business owner, you can only claim for things they claimed for. So it’s important to agree the value of the fixtures and integral features during the sale process. This also allows the seller to account correctly for them.
You can also claim ‘enhanced capital allowances’ for certain energy and water efficient equipment, such as zero-emission goods vehicles and some cars with low CO2 emissions.
How do I calculate the value of the item I want to claim for?
This will usually be the amount you paid for the item. If you owned it before you started using it in your business, or if it was a gift, you should use the market value.
What can’t I claim capital allowances for?
Buildings and land structures don’t qualify as capital allowances. These include doors, gates, shutters, mains water and gas systems, bridges, roads, and docks.
You can’t claim capital allowances for things you lease, either, or for things you only use for business entertainment. Gov.uk gives the examples of a yacht or a karaoke machine.
Do purchases for residential lettings businesses qualify?
You’ll only be able to claim for things if your business qualifies as a furnished holiday lettings business, or if the thing you want to claim for is in a common area of a residential building. This might include a table in the hallway of a block of flats.
Also, see gov.uk for the special rules on capital allowances if you run a care business.
How does the Annual Investment Allowance (AIA) work?
You can claim AIA on most plant and machinery. This means you can deduct the full cost of the item from your profits before you work out your tax.
A new AIA allowance kicks in each time you enter a new accounting period, and if you spend more than the AIA amount, you can claim writing down allowances on that extra spending.
Claiming for cars, things you owned for a different reason before you started using them in your business, or things that were given to you or your business, needs to be done via writing down allowances instead of AIA.
It’s worth noting that the AIA amount has changed a lot since 2008, so it’s a good idea to keep up to date with the latest AIA rates on gov.uk.
Are all assets eligible for the annual investment allowance?
No, they’re not. The most common examples of assets that are not eligible for the annual investment allowance are cars and assets that you’ve used for something else before bringing them into your business, for example a family computer. These assets qualify for capital allowances spread out over several years, rather than the full cost at once, which is what the annual investment allowance gives.
How do I claim for AIA and capital allowances?
You claim for them on your tax return. Read our article to find out more about how to fill in your Self Assessment tax return or, if you’re a limited company, how to file your company tax return.
How do I claim for other business costs?
Other things which you wouldn’t be able to claim as capital allowances include day-to-day running costs, things you buy and sell as part of your business, and interest payments or financing costs related to buying business assets.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute tax, financial or legal advice, nor is it a complete or authoritative statement of the rules and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert tax, financial, legal or other advice should be sought.