Capital Allowances: The Annual Investment Allowance limit

The Annual Investment Allowance (AIA) allows businesses to deduct the full cost of qualifying plant and machinery from their taxable profits in the year of purchase. The AIA limit was temporarily increased to £1 million, and the government has announced that this higher limit will be extended until 31 December 2021.

This extension provides businesses with continued support to invest in equipment and machinery as they navigate the economic recovery, offering significant cash flow advantages through accelerated tax relief.

What qualifies for AIA?

The AIA covers most items of plant and machinery used in a business. This includes commercial vehicles (vans, lorries, tractors), computer equipment, office furniture, manufacturing machinery, and integral features of buildings (such as electrical, lighting, and heating systems). It does not cover the cost of buying cars, land, or the structure of buildings.

Timing is everything

The date you incur the expenditure is critical for claiming AIA. For tax purposes, expenditure is generally incurred on the date there is an unconditional obligation to pay. However, if the equipment is bought on hire purchase, you can usually claim the AIA on the full capital cost in the year the contract begins, even though the payments are spread over several years. This provides a valuable upfront tax saving that can help fund the initial deposit.

The transition rules

When the AIA limit eventually drops back to its permanent level of £200,000 (currently scheduled for 1 January 2022), complex transitional rules will apply for businesses whose accounting periods span the change date. The maximum allowance available for the period after the drop will be strictly apportioned. Businesses planning significant capital expenditure should consult their accountant to optimise the timing of their purchases and maximise their AIA claim before the limit is reduced.