Annual Investment Allowance

What are capital allowances?

Expenses you incur in your business can either be related to sales or capital expenditure. If an item is expected to have a lasting benefit for the business —longer than a year— it should be considered capital expenditure.

Capital allowances are a way of getting tax relief on certain types of expenditures. These expenses are treated as equivalent business expenses, and thus they reduce taxable profits within a period. 

What is my annual investment allowance? 

You can deduct the total value of an item of qualifying expenditure for annual investment allowance (AIA) from your taxable profits.

If you happen to sell the item after claiming AIA, you may need to add this to your tax return.

What can you claim?

As a business, you are entitled to claim AIA on most plant and machinery up to the AIA limit —the AIA amount has temporarily increased to £1 million between 1 January 2019 and 31 March 2023.

You cannot claim AIA on:

1. Business cars

2. Items you owned before you started using them in your business

3. Items are given to you or your business

When can you claim relief?

You can only claim AIA in the period you bought the item.

The date in question is defined as:

• When you sign the contract, if the payment is due within four months

• When the payment is due, if the price is not expected within four months 

If you buy something under a hire purchase contract, you can claim for the payments you have not made yet when you start using the item, and you cannot claim the interest payments.

If your business goes bankrupt, you cannot claim AIA for items bought in the final accounting period. Instead, you need to enter a balancing charge or a balancing allowance on your tax return for the year your business closed down.

What assets are eligible for the annual investment allowance?

Businesses can claim capital allowances for the following assets

• Vans/ lorries

• Tractors and other agricultural machinery

• Office equipment comprising furniture, computers, computer hardware and software

• Some building fixtures such as fitted kitchens, bathroom fittings and air conditioning

• Integral features like heating, electrical systems, water systems, lifts, escalators and lighting systems

• CCTV systems and fire alarms

Using hire purchase to access the super-deduction

Fortunately, hire purchase agreements are allowed under the super-deduction rules, and this presents an opportunity for businesses to use hire purchases to access the scheme. As part of the budget announced on 3 March 2021, the government introduced new temporary first-year allowances, including a 130% super-deduction, which will take effect from 1 April 2021 to 31 March 2023.

Suppose you buy an asset at the value of £100k. Usually, a Writing-Down Allowance of 18% would allow you to save £8,524 over three years. However, the relief is limited to the first year and equates to 130% with the super-deduction. This will leave you with a return of £24,700 on the £100k asset (+£16,176).

The super-deduction is structured in a similar way to the annual investment allowance. 

For example, 4yrs 5% hire purchase from the lender. The interest on a £100k hire purchase agreement over the period would be £10,299

Hence, the £24,700 tax relief from the super deduction is enough to cover the interest on the loan twice over. Thus, the first year is essentially free.

Companies can claim 130% of the cost of the introductory rate for plants and machinery, except for cars, in the tax year in which the assets are bought. To qualify:

• The expenditure has to have been incurred on or after 1 April 2021, and before 1 April 2023 and must not come from a contract entered into before 3 March 2021

• The asset must be new. 

• It must not be provided for leasing (unless the lease is of background plant or machinery within a building)

What assets does the super-deduction include?

The super-deduction is valid for the following qualifying assets:

• IT hardware and software 

• Office furniture 

• Trucks and vans (not cars)

• Solar panels acquired through green finance

• Agricultural machinery 

• Electric vehicle charge points 

• Construction plant and machinery (including cranes and diggers)

• Refrigeration units 

• Computer numerical control (CNC) and other manufacturing and engineering equipment 

• Compressors

The AIA enables businesses to claim back 100% of the cost of qualifying plant and machinery in the year of acquisition. 

What are capital allowances for cars?

It is essential to know that capital allowances are calculated by evaluating the expenditure on the actual car and not the purchase price, as is the case with benefit-in-kind. Capital allowances are now available where simplified expenses are claimed.

Cars with co2 emissions

The government uses capital allowances to accelerate the transition to more environmentally friendly cars. New and unused vehicles with zero CO2 emissions can avail of the total 100% first-year allowance. Cars with CO2 emissions below 50g/km can claim an 18% writing down allowance in the main l pool. Vehicles with higher CO2 emissions will be placed in the special rate pool (6% rate of capital allowances). Any car that you use privately will be placed in a separate pool as allowances will be restricted by the amount of private use.

What is the small pools allowance?

Businesses which are not using the cash basis can claim capital allowances for capital items such as plant and machinery, tools and equipment. If you have a balance of £1,000 or less in your main (general) pool or special rate pool, you can claim capital allowances (called the small pools allowance) on the total amount of the asset. You cannot claim the small pools allowance and the writing down allowances.

What items fall into the special rate pool?

The main items in this pool will be long-life assets, integral features or cars with higher carbon dioxide (CO2) emissions.

These items only get a writing down allowance at 6% each year, but except for cars, you should be able to claim the annual investment allowance first before using the special rate pool.

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