Annual Investment Allowance

The annual investment allowance (AIA) provides 100% tax relief on qualifying expenditure on plant and machinery - not cars -  up to the maximum allowance available for each accounting period - for expenditure used in a trade or profession.

The AIA is a capital allowance, an amount you can write off against taxable profits for purchases of qualifying plant and equipment; not cars.


It is available alike to sole traders, partnerships and companies although some restrictions apply to companies in groups or those closely related to each other. It is not available to "mixed partnerships": where one or more of the partners are a company  

What counts as plant and machinery for AIA? 

• Machinery;
• Large Tools (small tools are usually written off as consumables);
• Furniture;
• Electrical equipment (televisions, radios, kettles, vacuum cleaners etc);
• Computers, printers;
• Telephones and telecommunication equipment;
• Other office equipment;
• Vans and other commercial vehicles;
• Fixtures and Fittings;
• Computer software with a life of more than two years.

What is the maximum AIA available?

The maximum AIA available depends on the accounting period of the business and its structure;

Companies

Accounting periods falling into the period:

• 1 April 2008-31 March 2010                    £50,000
• 1 April 2010-31 March 2012                  £100,000
• 1 April 2012 onwards                             £25,000

Other Businesses

Accounting periods falling into the period:

• 6 April 2008-5 April 2010                    £50,000
• 6 April 2010-5 April 2012                  £100,000
• 6 April 2012 onwards                           £25,000

The AIA is also restricted if the accounting period is less than 12 months and transitional rules apply to accounting periods straddling 1 or 6 April 2012.

Bonus for self-employed businesses.

Profitable self-employed business owners  face an additional 50% income tax charge on earnings in excess of £150,000. Judicious use of the AIA can have considerable benefits.

Consider a self-employed trader with taxable profits after all deductions, but before claims for capital allowances, of £200,000.

The 50% income tax charge, not the total tax charge, would be £25,000. (£200,000 - £150,000 at 50%) If the trader spent £25,000 on qualifying plant or equipment, that qualified for the AIA, he or she could write off the £25,000 against the £200,000 profits and half the 50% rate income tax charge would be eliminated! A tax saving of £12,500.

In cash terms that represents a 50% recovery of the £25,000 investment in the new plant or equipment.

Lobbying does pay!

In the past few days some national newspapers have been crowing about the part they and their readers played in getting the Government to back down on certain tax proposals.

This week the Government changed its mind about some of the VAT changes announced in the March Budget speech.

1)  The much derided so called ‘pasty tax’ rules have been revised to remove certain hot foods from the threat of VAT increases. For those involved in selling takeaway food it will now be necessary to pay close heed to the rules as they progress to the statute book to see what will and will not be affected by the changes.

2) There was also a ‘U-turn’ with regard to the proposed imposition of a 20% VAT liability on static caravans which has now been revised to 5%.

3) The £30 million the Government will contribute to a fund for churches to call on to help ease the burden of the VAT changes for alterations to listed buildings is argued by some to have also been as a result of fierce lobbying.

4) We will have to see whether the major concerns voiced by the charitable sector, with regard to the proposed ‘relief capping’ rules, will be encompassed in the consultation documentation we hope to see over the summer.

These developments raise two issues: lobbying can seemingly pay off; and the tax rules, proposed and existing, can change in an instant with the result that it always pays to be up to date with proactive input from all your professional advisers.