Annual investment allowance (AIA)

Definition

The annual investment allowance (AIA) is a tax incentive designed to encourage business investment in qualifying assets, and is applicable to businesses operating in the UK.

What is the annual investment allowance?

The AIA allows a business to deduct the full value of qualifying capital expenditures from its taxable profits in the year of purchase, up to a specified limit.

The AIA applies to a broad range of qualifying assets, including machinery, equipment, commercial vehicles, and certain building fixtures. It is important for businesses to make sure that the assets they intend to claim fall within the scope of the AIA. Some assets may be excluded from AIA eligibility, and certain restrictions may apply. For instance, cars do not qualify for the AIA, and special rules exist for connected parties.

The allowance limit is periodically reviewed and adjusted by tax authorities. As of the last available information, the AIA limit was £1 million per annum. This means that businesses can deduct the full cost of qualifying capital expenditures, up to the specified limit, from their taxable profits.

To benefit from the AIA, businesses need to make a claim in their tax returns. Adequate documentation, including invoices and details of qualifying assets, should be maintained to support these claims and comply with tax regulations.

Example of annual investment allowance

1. Capital expenditure decision:
   • XYZ Manufacturing decides to invest in new machinery to enhance its production capabilities. The company purchases a state-of-the-art manufacturing machine for £150,000.
2. Calculation of AIA claim:
   • The annual investment allowance for the tax year is £200,000. Since the cost of the machinery is £150,000, XYZ Manufacturing can claim the full £150,000.
3. Tax relief calculation:
   • Assuming XYZ Manufacturing has taxable profits of £500,000 before considering the AIA, the AIA claim would result in a tax relief of £150,000.

   Taxable profits (before AIA) = £500,000

   $\text{AIA Claim }=\pounds 150,000$

   $\text{Taxable profits (after AIA)}=\pounds 350,000$

   The company’s taxable profits are reduced to £350,000 after accounting for the full AIA claim.