Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) is a form of tax relief for British businesses that is designated for the purchase of business equipment. The AIA allows a business to deduct the total amount of qualifying capital expenditure up to a certain limit from its taxable profits in a given tax year. This allowance is earmarked for the purchase of business equipment, primarily tools and machinery.

The Annual Investment Allowance (AIA) was introduced in 2008 to encourage businesses to invest in plant and machinery for the purpose of stimulating economic growth. One of the main incentives of the allowance is that it facilitates faster tax relief since the full expenditure may be claimed in the year of purchase, rather than over a number of years.  

The allowance may be claimed by companies as well as by sole proprietors. Partnerships are also entitled to the AIA, provided that partners are individuals. A sole proprietor or member of a partnership with more than one business is usually eligible for the Annual Investment Allowance for each business, unless the businesses are operated on the same premises and/or conduct similar activities. In instances where the same person is in control of two or more limited companies, these companies are only entitled to one AIA between them, and may choose how to allocate this allowance.

Since its inception, the levels of expenditure which may be claimed under the AIA have undergone a number of changes. The expenditure amount was raised to £100,000 in 2010 from £50,000 in 2008. From April to December of 2012, it was reduced to £25,000, after which it was subsequently raised again in January 2013 to a level of £250,000.

From April 2014, a temporary measure was introduced that doubled the previous amount to £500,000 until December 2015. The intention was that following this period, the level would revert to its previous low point of £25,000. However, in July 2015, the U.K. government announced that the AIA would be set at a permanent level of £200,000.

Most assets purchased for business purposes can be claimed as qualifying expenses for AIA, with the primary categories as listed below:

• Office equipment including computer hardware and certain types of software, and office furniture
• Parts of a building referred to as integral features
• Certain fixtures, such as air conditioning, fitted kitchens, or bathroom fittings
• Lorries or vans used for moving purposes
• Machines used for business purposes
• Agricultural machinery including tractors
• Machines used for providing entertainment, such as arcade game machines

Assets that cannot be claimed include buildings, cars, land or structures such as bridges or docks, and items used solely for business entertainment. Part of the cost of cars used for business purposes can be deducted, but not as a part of the AIA. The exception to this rule on cars is the cars used by driving schools, which must be adapted to have dual control, and as such may be claimed through AIA.

HM Revenue & Customs (HMRC) offers detailed guidance on claiming the Annual Investment Allowance with the Capital Allowances for Plant and Machinery Toolkit.