If you purchase plant or machinery that qualifies for the annual investment allowance (AIA), you can deduct the full cost of that asset from your profits before calculating your tax liability.
What is Annual Investment Allowance (AIA)?
The annual investment allowance (AIA) allows businesses to claim tax relief on purchases of certain assets of more than £200,000 for up to £1,000,000 per year.
The AIA is a 100% capital allowance on qualifying expenditure. Capital allowances are a form of tax relief for businesses. They allow you to claim a tax reduction when purchasing business assets.
Every time you enter a new accounting period, a new AIA allowance applies.
Who can claim AIA?
AIA and the capital allowances regime is available to limited companies, sole traders and partnerships.
If you are a sole proprietor or partner with an annual income of £150,000 or less, the cash basis system is usually more suitable.
How much is the annual investment allowance in 2023?
The government imposes a limit on the amount of annual investment allowance a business can claim in a given year, so if you purchase assets costing more than the maximum annual threshold, you will not be able to claim annual investment allowance on all of them.
The annual investment allowance has been permanently set at £1,000,000 for qualifying expenditure on plant and machinery from 1 April 2023.
If you spend more than the AIA on qualifying plant and machinery, the excess amount can be claimed as a writing down allowance.
You get a new allowance for each accounting period.
How do you claim Annual Investment Allowance (AIA) and capital allowances?
You claim for AIA and capital expenses on your annual tax return; either your corporation tax return if you’re a limited company or on your self assessment return if you’re a sole trader.
Qualifying assets
The vast majority of plant and machinery bought for a business qualify for AIA, meaning you can deduct the whole cost of the item from your profits prior to calculating your tax.
Under the current rules, you can claim capital allowances on “plant and machinery” purchased as business assets. These include:
- “Integral components” of a structure
- Some fixtures, such as equipped kitchens, bathroom suites, fire alarm and CCTV systems changes to a structure to install machinery and equipment (but not repairs)
- Elevators, escalators, and moving walkways; space and water heating systems; and elevators, escalators, and moving walkways are some examples of integral characteristics.
- Systems for air conditioning and air cooling
- Heating and cooling water systems (but not toilet and kitchen facilities)
- Lighting systems and other electrical systems
- External solar shading
You can also claim capital allowances for:
- Demolition costs for the plant and machinery and for .
- Extracting minerals
- Research and development
- ‘Know-how’ (intellectual property about industrial techniques)
- Patents
- Dredging
- Property renovations in certain disadvantaged areas of the UK
You can claim capital allowances regardless of whether you own or rent the building where your firm is operating, however, only purchased assets can be claimed for.
If you purchase a building from a prior business owner, you can only recover expenses that they reported. This allow the seller to account for the assets correctly, and makes it essential to agree on the value of the fixtures and fittings during the selling process.
You can also claim enhanced capital allowances for certain energy- and water-efficient equipment, such as zero-emission commercial vehicles and some low-CO2 vehicles, provided you have purchased them new and unused.
- electric cars and cars with zero CO2 emissions
- plant and machinery for gas refuelling stations, for example storage tanks, pumps
- gas, biogas and hydrogen refuelling equipment
- zero-emission goods vehicles
- equipment for electric vehicle charging points
- plant and machinery for use in a freeport tax site, if you’re a company
What can’t I claim AIA for?
You also cannot claim AIA for business cars, items you owned for a different purpose prior to using them in your business, or items gifted to you or your firm; instead you would claim writing down allowances.
Further guidance on categories of plant and machinery expenditure that do not qualify for AIA are set out in section 38B of Capital Allowances Act 2001.
What’s the difference between the Annual Investment Allowance and Writing Down Allowances?
Businesses claim the AIA for expenditures that would otherwise qualify for writing down allowances (WDAs). WDAs provide relief for qualifying capital expenditures over multiple tax periods, at either the ‘main’ or ‘special’ rates. AIA effectively expedites the tax relief, benefiting companies through improved cash flow.
What can’t I claim capital allowances on?
You cannot claim capital allowances for buildings and land structures (incuding doors, gates, shutters, mains water and gas systems, bridges, roads, and docks) or leased items or items used exclusively for business entertainment, such as a yacht and a karaoke machine.
In addition, you cannot claim capital allowances for ordinary, day-to-day operating expenses, items purchased and sold as part of your business, and interest payments or financing charges associated with the purchase of business assets.
How do I calculate the value of the item I want to claim for?
The asset value is typically the price you paid for it. If you owned the asset prior to using it for your business, or if it was a gift, you should use its current market worth.
If your business is registered for VAT, you can deduct the AIA from the entire cost of the asset minus any VAT that can be reclaimed. If your business is not VAT-registered, you can deduct the annual investment allowance from the asset’s total cost.
Do purchases for residential lettings businesses qualify?
You can only claim capital allowances if your firm qualifies as a furnished holiday lettings business or if the item in question is located in a residential building’s common space, such as a table in the corridor of an apartment building.
What if I operate as a sole trader or in a partnership?
If your annual income is less than £150,000 and you are trading as a sole trader or partner, you may be eligible to use cash-basis accounting. Under the cash-basis accounting system, you only have to declare funds when they come into and out of your business.
Annual Investment Allowance 2023
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Legal disclaimer
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.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
