What is Annual Investment Allowance?

Posted on Posted in Reliefs & Allowances

Whenever you are planning to expand your business, HMRC gives you many Capital Allowances. One of such allowance is Annual Investment Allowance.

 

What exactly is Annual Investment Allowance?

Simply speaking, it’s an allowance in which 100% of the cost of assets can be claimed, subject to some limits.

 

What are the limits on Annual Investment Allowance?

Depends on specific tax year. HMRC has set different Annual Investment Allowances for different tax years as under.

Sole traders/partners Limited companies AIA
From 1 January 2016 From 1 January 2016 £200,000
6 April 2014 – 31 December 2015 1 April 2014 – 31 December 2015 £500,000
1 January 2013 – 5 April 2014 1 January 2013 – 31 March 2014 £250,000
6 April 2012 – 31 December 2012 1 April 2012 – 31 December 2012 £25,000
6 April 2010 – 5 April 2012 1 April 2010 – 31 March 2012 £100,000
6 April 2008 – 5 April 2010 1 April 2008 – 31 March 2010 £50,000

 

The only reason, I have put all these rates in this post is to make a point that HMRC has changed Annual Investment Allowance radically over last few years. And the with these rates being changed, timing of the purchase of an asset becomes very important to ensure that you get the much needed Annual Investment Allowance.

While claiming the Annual Investment Allowance, the timing of the purchase of an asset is very important. You need to ensure that you are buying these assets at an appropriate time in order to maximise your AIA claim.

 

What are the qualifying assets for Annual Investment Allowance?

Plant & Machinery

Fixtures

Vans (But not Cars)

 

What assets are excluded from Annual Investment Allowance?

Motor Cars (However, you can claim Annual Investment Allowance on Vans, Lorries and Motorbikes)

Land and Building (However, if you spend anything to alter land or building for the installation of Plant & Machinery, you will be able to claim AIA on that spend)

You can’t claim Annual Investment Allowance on items that you owned for another reason before you started using them in your business

 

What happens if the purchase value of the qualifying asset is more than the maximum limit explained above?

You can claim Written Down Allowances on the excess.

The balance of any expenditure on which the AIA is not claimed is carried forward and added to the relevant pool. The pool choice depends on the nature of the asset:

The asset will fall in one of the following three pools. 

  1. Main pool
  2. Special rate pool
  3. Short-life asset pool. 

Please note that you don’t have to claim the full cost of the asset for the Annual Investment Allowance if it results in a tax loss and due to restrictions, you are now allowed to have tax losses.

 

Can I choose as to which qualifying expense will be claimed against Annual Investment Allowance?

Absolutely. It is your choice. And this can be used as a good tax planning tool especially when you have spent more than the available Annual Investment Allowance. For example, some assets qualify for written down allowance at the rate of 8% and some do qualify at the rate of 18%. In such case, obviously choosing the asset with the WDA rate of 8% for AIA will be more tax beneficial

 

What happens when I sell (or dispose of) the asset on which I have claimed Annual Investment Allowance?

You will end up with balancing charge. You will need to calculate the value for such disposal.