Understanding annual investment allowances
One of the headlines of the chancellor’s Autumn Statement was the increase in the Annual Investment Allowance (AIA) from £25,000 to £250,000 for two years commencing 1 January 2013.
1. What is AIA?
Annual Invest Allowance is effectively a 100% first-year allowance for business expenditure on qualifying plant or machinery.
2. What are qualifying plant and machinery?
Qualifying plant or machinery covers almost all assets a person may buy for the purposes of his business. The only business assets not covered are land, buildings (although integral features can be) and cars.
3. Who can claim AIA?
AIA can be claimed by an individual, a company and a partnership of which all the members are individuals, carrying on a qualifying activity. A qualifying activity includes trades, professions, vocations, ordinary property businesses and employments or offices. Trusts and partnership of which a company is a member do not fall within the definition of a qualifying person.
4. What is the maximum AIA?
Maximum AIA is:
£250,000 on expenditure from 1 January 2013 to 31 December 2014
£25,000 on expenditure incurred from 6 April 2012 (1 April 2012 for corporation tax purposes) to 31 December 2012
£100,000 on expenditure incurred from 6 April 2011 (1 April 2011) to 5 April 2012 (31 March 2012)
maximum allowance is proportionately increased or reduced where the chargeable period is more than or less than a year.
5. What happens if the accounting period straddles the affected dates?
Transitional rules apply for chargeable periods which straddle the affected dates. For example a business with the year end 28 February 2013 would have three chargeable notional periods. The maximum AIA that this business would be eligible to claim on qualifying expenditure is £68,750 ((£100,000×1/12+£25,000×9/12+£250,000×2/12). However this amount is subject to an additional overriding rule for each notional chargeable period. The maximum allowance must be calculated as if the limit were for that national period. For more practical examples on maximum AIA please see our Guide To… AIAs.
6. What happens if the business spends more than AIA limit?
Where businesses spend more than the annual limit, any additional expenditure is dealt with in the normal capital allowances regime, entering either the main rate or special rate pool, where it will attract writing-down allowances at the 18% or 8% rate respectively.
7. Are there any other restrictions on AIA?
Businesses under common control and group of companies are entitled to only one AIA. It is not available on assets not used immediately in the trade, or on a transaction with a connected person, or in the chargeable period in which the qualifying activity is permanently discontinued.
8. What about expenditure on energy-saving plant and machinery?
Investment in certain green technologies is eligible for enhanced capital allowances. These are in addition to the AIA allowance and, like the AIA, would be eligible for 100% tax relief in the first year.
9. When is the expenditure treated as incurred?
Capital expenditure is treated as incurred as soon as there is an unconditional obligation to pay, even if all or part of it is not required to be paid until some later date. However, expenditure is treated as incurred on a later date where any part of the expenditure is not required to be paid until a date more than four months after the date determined above.
10. What is the economic impact?
Increase in AIA encourages small and medium size businesses to invest in plant and machinery, stimulating growth. For a top rate taxpayer it would mean a 50% reduction of tax on any amount spent on qualifying equipment.