When you spend money buying certain items for your business, HMRC lets you claim tax relief on some of the amount you’ve spent. For limited companies, this will reduce the amount of Corporation Tax you pay.

Sole traders don’t pay Corporation Tax but can still claim relief for specific purchases to reduce the personal tax they pay. 

This guide will explore one form of tax relief you can claim, called the annual investment allowance (or AIA). Find out:

  • What the annual investment allowance is
  • How it works
  • Who is eligible for annual investment allowance
  • What capital expenditure qualifies for the AIA
  • How it has changed over the years
  • When and how to claim AIA

What is the annual investment allowance?

Annual Investment Allowance (AIA) is a form of tax relief aimed at helping UK-based businesses buy necessary equipment. The AIA allows you to deduct the total amount you spent on a qualifying item (explained below) up to a certain limit from your taxable profits that tax year. This allowance mainly applies to tools and machinery. 

How does it work?

Say your business buys a piece of equipment that qualifies for AIA. In that case, you can deduct 100% of the cost from your business’ profits before you work out how much tax you owe on that profit. 

However, there’s a limit to how much allowance you can claim in a year – meaning if you purchase items that cost more, you can’t claim AIA on all of them. 

The limit for how much you can claim used to be £200,000. However, in January 2019, the amount was temporarily increased to £1,000,000, which will be in effect until 1st January 2022.

Additionally, businesses that are registered for VAT (value-added tax) can claim the AIA on the total cost of the item, minus any VAT they can reclaim on it. Businesses that aren’t registered for VAT merely claim AIA on the total cost of the equipment.

Who is eligible for the annual investment allowance?

You can claim AIA as a sole trader or owner of a limited company. Sole traders with more than one business are usually eligible to claim the annual investment allowance for each business. That is, unless these businesses operate within similar industries, on the same premises or do similar work. If your businesses fall into this category, it may be best to double-check with your accountant to clear up if and how much AIA you can claim.

If you’re in control of two or more companies, you are only entitled to one AIA between them. However, it’s your choice how to allocate the allowance to your different businesses. If you have a younger business that is in need of growth investment, this can go some ways to helping it further.

What capital expenditure qualifies for the AIA?

You are able to claim most tools or equipment you purchase to run your business better. However, the main types of items you can claim include:

  • Office equipment like computer hardware, office furniture, and certain types of software
  • Parts of a building referred to as integral features like heating and electrical systems
  • Some fixtures, such as air conditioning, fitted kitchens, or bathroom fittings
  • Vans or lorries used for moving purposes
  • Machines you use for business purposes, like a floor sander for a contractors
  • Agricultural machinery, such as tractors
  • Machines used for providing customer entertainment, like arcade game machines

Items that don’t qualify for AIA include:

  • Buildings
  • Cars
  • Land
  • Structures like bridges or docks
  • Machines you only use for business entertainment

It’s worth mentioning that you can claim tax relief on vehicles for costs associated with business purposes through your expenses, instead of your AIA. The only exception to this rule is for cars used by driving schools as these cars must be adapted to have dual control (meaning the passenger side also has pedals). Here, they may be claimed through AIA. 

You can learn everything you need to know about business expenses in this comprehensive guide and learn more about what qualifies for AIA from HMRC.

How has the AIA changed over the years?

The AIA amount has changed several times since April 2008, so it’s a good idea to check in regularly, so you don’t miss any updates. See a detailed list of the changes to the AIA over the years in the table below:

If the AIA changed in the period you’re claiming for, you will need to adjust the amount you can claim.

When and how do I claim for Annual Investment Allowance?

The first rule to remember is that you can only claim AIA on an item during the accounting period in which you bought it, whether that’s a month, quarter, or year. 

The official date you bought the item will be:

  • When you signed the contract (if payment is due within less than four months)
  • When payment is due (if it’s due more than four months later)

If you buy something under a hire purchase contract (meaning you pay off the amount for a set time), you may claim on your future payments even though you haven’t made yet. However, you can only claim the principal sum of the item, and not the interest applied to your payments (aka the added amount you pay for spreading out the payments in the first place). You can check your loan documents to find this figure.

Should you ever close up shop, you can’t claim AIA for items you bought in the final accounting period. 

You claim your AIA on your Self Assessment tax return.

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