Annual Investment Allowance (AIA) - What is Annual Investment Allowance?
Annual Investment Allowance (AIA) - relating to capital allowance, is a tax relief for British businesses dealing with business equipment. Businesses can deduct up to £200,000 from their taxable profits within a tax year.
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The £200,000 limit was set in the hope that it would be used for tooling and machinery necessary for businesses.
Any claim you make under AIA is called "Capital Allowance"- and the things you claim for are most likely going to be tangible assets
Now that's all settled, what can Annual Investment Allowance be used for?
- Vehicles such as lorries or vans (so long as they are used for moving)
- Certain property fixtures e.g. air conditioning, bathrooms, fitted kitchens
- Office equipment such as computer hardware, certain software, and office furniture
- Machines solely used for business purposes
- Agricultural machinery such as tractors
There are also a few other cases where Capital Allowance can be claimed- some mildly unconventional:
- If what you are claiming for is a gift, use the market value to determine your claim
- Renovations of business premises if you're in a disadvantaged area of the UK
What can't Annual Investment Allowance be used for?
AIA can't be used for:
- Entire buildings
- Cars (except cars used by driving schools that have been modified for dual controls)
- Items used purely for business entertainment (foosball tables, pinball machines, taking clients out etc)
How do I claim Capital Allowance under the Annual Investment Allowance scheme?
You can make a claim so long as you are a company, an individual, or partnerships where all the members are individuals. A sole trader or a member of a partnership with more than one business can claim for the businesses individually- so long as none of the businesses share the same premises or are within similar industries.
If you happen to be an individual that runs more than one business, you can make one capital allowance claim between the two- but how you divide the claim between them is up to you.
If you're ever unsure about what you can or can't claim capital allowance on, HMRC has a handy guide. Claims themselves are made via your tax return.
Annual Investment Allowance: An Example
Dave runs a furniture removals and restoration business. This means that he needs lorries and vans, a premises for his workshop, as well as a small office for administration tasks such as orders and payroll. Next to all of what he needs to run his business he would be able to claim Capital Allowance on under the AIA scheme.
How he decides to split this claim is entirely up to him. Eventually, after giving it some thought, he decides that he's going to:
- Claim £100,000 for removals lorries and vans
- £40,000 for furnishing the office with furniture, a small bathroom, a small kitchen, and some computer equipment.
- £7,500 for tools for word-working and as part of the restoration side of the business
This brings his total claim for the year to £147,500.
How do I report this claim on a balance sheet?
The equipment you've purchased and made a claim for will naturally depreciate in value, so you'll need to figure out how long you're planning to use it before you decide to replace it with a newer version, and divide the amount you paid by the number of years it'll be in service.
As an example, if you purchased computer equipment for an office for £10,000 and estimate that you'll be using them for 4 years before replacing them with newer models, then you'd divide £10,000 by 4 and put down £2000 as a depreciation expense to appear on your balance sheet. This method is known as reduced balance depreciation.
When your tax is calculated for that year, your depreciation expense is included along with your capital allowance (in this case all £10,000). However, in years 2, 3, and 4 your depreciation cost would also be added in, but there would be now capital allowance to claim. The idea of capital allowance is to help with cashflow when a business is in its infancy- not a perpetual tax break.
What happens if I sell an asset or assets that I've claimed Capital Allowance for?
We'll use the above example again- if after 4 years you've decided that you'll upgrade your computer equipment, but you manage to sell it for £3,000, your tax return will include a "balancing charge" of £3,000, with tax of £570 (using the corporation tax rate of 19%).
Annual Investment Allowance: A Brief History
Since it was announced in 2008, the amount that could be claimed against has varied wildly. Originally, the amount was £50,000, which was then raised to £100,000 in 2010. During April to December of 2012, the amount was lowered to £25,000, and in January 2013 it rocketed up to £250,000. In April 2014 through to December 2015, it was temporarily raised to £500,000, with talk of it being lowered back to the original £25,000 afterwards. Finally, in July 2015, the limit was set permanently to £200,000.
Annual Investment Allowance and Debitoor
Within Debitoor, it's easy to figure out depreciation costs- as well as already have them taken into account when tax time comes around. Just enter your expense, mark it as an asset, and how long you'll be using it for. Then you can relax and let Debitoor take care of the rest. That way, when it comes to your profit and loss reports, you'll already have it covered.