The annual investment allowance (AIA) is part of the capital allowances regime whereby tax relief is given for capital expenditure on plant or machinery. The AIA is available for qualifying expenditure incurred by an individual, a partnership of individuals or a company. The expenditure must be incurred for the purposes of a qualifying activity, for example a trade, profession or vocation or a lettings business.
Normally, capital allowances on plant or machinery are given at the rate of 18%, or in some cases 6%, on the reducing balance of the expenditure, which means that the cost is written off for tax over a number of years. The AIA gives relief for 100% of the expenditure in a single year.
The amount of expenditure qualifying for the AIA is currently limited to £1 million per year. This was increased from £200,000 with effect from 1 January 2019 and is due to revert back to that amount with effect from 1 January 2021. Whenever the maximum amount of the AIA changes, there are special rules for computing the maximum for any accounting period overlapping the date of change; it is more than a simple time apportionment.
In certain circumstances expenditure is excluded from qualifying for the AIA. The most notable exclusion is expenditure on a car, but also excluded, for example, is expenditure incurred in the final accounting period of the business.
There are some restrictions on entitlement, for example where the AIA is claimed in relation to an asset which is partly used for non-business purposes, in which case the AIA is reduced to such extent as is just and reasonable, or where there are two or more related businesses under common control. A group of companies, for instance, is entitled to only a single AIA.