The annual investment allowance explained

Now is the time to invest in new plant and machinery for maximum tax benefits, writes Paul Webb, a tax partner at accountancy firm Robert James Partnership.

Update (19 March 2014) – Chancellor George Osborne has just announced far-reaching changes to the Annual Investment Allowance in a bid to help businesses looking to invest.

The feature below is no longer entirely accurate. Click here for an update.

With the AIA set to be increased, now is the time to invest in new plant and machinery for maximum tax benefits, writes Paul Webb, a tax partner at accountancy firm Robert James Partnership.

When the previous government doubled the Annual Investment Allowance (AIA) from £50,000 to £100,000, the move was widely welcomed. However, it was since amended by the coalition government, which reduced the AIA to just £25,000 from 6 April 2012. Now, as part of the Autumn Statement, it is being incrased again, this time to £250,000. Below, I have answered some of the questions most frequently asked about the AIA and capital allowances.

What is the AIA?

The AIA is a kind of capital allowance, which offers tax relief at 100 per cent on qualifying expenditure in the year of purchase. The maximum you can deduct from your taxable profits is now set to be £250,000. This pro-rates for short or long periods, and also for periods that span the operative dates and rates of allowance. 

Who can claim?

Almost any entity, provided the business activity satisfies one of these criteria: trading; commercial property letting; office or employment; or leasing. The only business structures which are not eligible for the AIA are mixed partnerships (that is, partnerships comprised of both individuals and companies) and trustees.

Is there a catch?

There are a few exclusions. Splitting a business with related interests into a group of companies is a well-known tax planning strategy, but it won't help in the case of the AIA, since the subsidiaries would only get £250,000 between them. This is also the case for related companies under common control ("related" companies are those that share premises, or carry out related activities). For companies which have a group structure, careful tax planning is important to calculate the best way to split the allowance amongst related businesses.

Are there any exemptions?

Yes, there are assets that would not qualify for the allowance, such as cars, and you should seek advice accordingly.

What about green technologies?

Investment in certain green technologies is eligible for enhanced capital allowances (ECA). These are in addition to the £250,000 allowance and, like the AIA, would be eligible for 100 per cent tax relief in the first year. A set of qualifying technologies is available on the ECA website.

What happens after the first £250,000?

Generally speaking once the investment goes beyond the AIA threshold, a flat rate of 18 per cent is applied to apportion the investment over subsequent years.  So, if a firm buys £275,000 worth of new IT systems, it can allocate the first £250,000 of expenditure against the AIA and the remaining £25,000 would achieve tax relief at 18 per cent a year on a reducing balance.

What about expenditure that doesn't qualify for the AIA?

Some types of expenditure only qualify for a writing down allowance of 10 per cent. This includes so called 'integral features', for instance electrical or cold water systems, thermal insulation and long-life assets.

What if I have to repair or replace an asset?

Spending on repair or replacement is normally an allowable deduction against income and so full tax relief is given immediately. However, if the repair or replacement costs in the last 12 months are greater than half of the total cost of replacing an asset, the spending is treated as capital expenditure. For example, if a business spends £3,000 in the last 12 months repairing or replacing parts of its air conditioning system, but the total cost of replacing the aircon is £5,000, then the £3,000 would be treated as capital expenditure and qualify for allowances at 10 per cent.

Is this worth the hassle?

The increase to the AIA marks a big change for businesses and we believe the new generous allowance presents rather a good opportunity for businesses wanting to make any investments to be as tax efficient as possible. It effectively means the chance to save up to 50p in taxable profits for every £1 a company has invested in new equipment.

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