Increase in annual investment allowance (AIA) 2019/2020:
Annual investment allowance is tax relief for businesses in the UK on purchase of business equipment or investments on plant and machinery and the business can claim a specific amount of AIA by deducting the total expenditure of that equipment from its taxable profits before work out payable tax and class 4 NI in the same tax year.
In financial bill 2018, the government announced temporarily increase the maximum amount of annual investment allowance 2019/2020 to £1,000,000 from 1st Jan 2019 to 31st Dec 2020. Government increase this AIA to give incentive and to stimulate the businesses to invest on plant and machinery or on qualifying machinery for economic growth. Moreover, businesses can lower their tax burden or get faster tax relief by claiming the full expenditure under this increase in AIA in the year of purchase. Read our article to know more about government announcements in budget 2020.
Example of annual investment allowance:
For example, if you incur expenditure on new machinery is £240,000 ( qualifies for annual investment allowance 2018) on 14th November 2018 for the year-end 31st March 2019 and your business profit is £300,000 then you can calculate maximum investment allowance based on 9/12ths of £200,000 plus 3/12ths of £1,000,000 before work out the payable tax in such a way;
- For the period from 1st April to 31st Dec 2018, annual investment allowance would be
= Month/year× Annual investment allowance
= 9/12 × £200,000 = £150,000 (AIA)
- For the period from 1st January to 31st March or 3/12ths of AIA 1,000,000
= Month/Year × Annual investment allowance
= 3/12 × £1,000,000 = £250,000
You can claim total max investment allowance by adding the value of (a) and (b)
= £150,000 + £250,000 = £400,000
As the temporary increase in annual investment allowance for the year 31st March 2019 not had taken place on 14 Nov 2018, £200,000 of this expenditure is covered by AIA. So, you leave available annual investment allowance of £200,000 (max AIA of £400,000 less £200,000 used) for three months to 31st March 2019 and your balance £40,000 transferred to the special rate pool or a normal pool for claiming writing down allowance on that extra spending. You can claim annual investment allowance £200,000 on the cost of machinery by deducting the value of expenditure that is covered by annual investment allowance from taxable profit before work out your tax.
Purchase price = £240,000
Profit = £300,000
Annual investment allowance = £200,000
Annual investment allowance minus profit
£200,000 – £300,000 + £100,000 (taxable profit)
You will pay tax on £100,000
To claim investment allowance on your tax return read our blog for more details on how to file your self-assessment tax return.
Background to measure changes in annual investment allowance:
Annual investment allowance undergoes changes for several for time:
Annual investment allowance from 2008 to 2010 was £50,000 that was raised to £100,000 from 2010 to 2012.
After that from April 2012 to Dec 2012, it reduced to £25,000. From Jan 2013 to 2014 it increased again to £250,000. From April 2014 it temporarily doubled increased to £500,0000 until Dec 2015. From 2016 the government set the rate of AIA to £200,000 from 1st Jan 2016 to 31 Dec 2019.
Types of expenditures that are qualifying for AIA:
You can claim for annual investment allowance on expenditures of all mechanical machinery that you use for business purpose and that are qualify for investment allowance including printers, vans, diggers, lorries, agricultural machinery such as tractors, office equipment and furniture, computer hardware, building fixtures including air-condition, kitchen fitting to bathroom fitting.
Expenditures on which you cannot claim AIA:
You cannot claim AIA on cars and on other items that you used for other reasons before using them for business purpose but can claim writing down allowance on those items. For example, if you use a car for personal use before employing it to business use, you cannot claim AIA but can claim writing down allowance on that item.
Besides this, you can claim writing down allowance when you spend on an item above the AIA.
You can get in touch to our experience team of Berkshire accountants at Berkshire accountants limited if you want to know about whether your investment qualifies for investment allowance or not and want to know about how you can make most of the annual investment allowance to reduce your taxable income.