Annual Investment Allowance (AIA)

What Is the Annual Investment Allowance (AIA)?

The Annual Investment Allowance (AIA) is a form of tax relief for British businesses that is designated for the purchase of business equipment. The AIA allows a business to deduct the total amount of qualifying capital expenditure up to a certain limit from its taxable profits in a given tax year. This allowance is earmarked for the purchase of business equipment, primarily tools and machinery.

Understanding Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) was introduced in 2008 to encourage businesses to invest in plant and machinery for the purpose of stimulating economic growth. One of the main incentives of the allowance is that it facilitates faster tax relief since the full expenditure may be claimed in the year of purchase, rather than over a number of years. 

Eligibility for the AIA

The allowance may be claimed by companies as well as by sole proprietors. Partnerships are also entitled to the AIA, provided that partners are individuals. A sole proprietor or member of a partnership with more than one business is usually eligible for the Annual Investment Allowance for each business, unless the businesses are operated on the same premises and/or conduct similar activities. In instances where the same person is in control of two or more limited companies, these companies are only entitled to one AIA between them, and may choose how to allocate this allowance.

Changes to the Amount of the AIA

Since its inception, the levels of expenditure which may be claimed under the AIA have undergone a number of changes. The expenditure amount was raised to £100,000 in 2010 from £50,000 in 2008. From April to December of 2012, it was reduced to £25,000, after which it was subsequently raised again in January 2013 to a level of £250,000.

From April 2014, a temporary measure was introduced that doubled the previous amount to £500,000 until December 2015. The intention was that following this period, the level would revert to its previous low point of £25,000. However, in July 2015, the U.K. government announced that the AIA would be set at a level of £200,000 and in January 2019 it was set temporarily to £1,000,000 for the next two years.

Capital Expenditure That Qualifies for the AIA

Most assets purchased for business purposes can be claimed as qualifying expenses for AIA, with the primary categories as listed below:

Assets that cannot be claimed include buildings, cars, land or structures such as bridges or docks, and items used solely for business entertainment. Part of the cost of cars used for business purposes can be deducted, but not as a part of the AIA. The exception to this rule on cars is the cars used by driving schools, which must be adapted to have dual control, and as such may be claimed through AIA.

HM Revenue & Customs (HMRC) offers detailed guidance on claiming the Annual Investment Allowance with the Capital Allowances for Plant and Machinery Toolkit.