The Annual Investment Allowance (AIA) is the tax relief a business receives for investing in assets that it purchases. Most plant and machinery qualifies – you can read what’s allowed here.
You can reduce your tax bill (or personal tax bill if you are a sole trader or partnership) by deducting allowable assets in their first year of purchase up to a specified limit set by HMRC.
Previously this limit has been £200,000 but for 2019 and 2020, this has temporarily increased to £1,000,000.
For those that have a year end different to 31st December there will be a transition period. This allows for the part of your financial year being under the £200,000 limit and part under the £1,000,000 limit.
For example, if your financial year end was June 2019:
6 months of the £200k allowance – 1st July 2018 to 31st Dec 2019
i.e. £100k as half your year was under the old limit.
6 months of the £1m allowance – 1st Jan 2019 to 30th June 2019
ie £500k as half your year was under the new limit.
This gives you a total annual allowance of £600k for that financial year.
The only caveat is that during the period of the lower allowance, you cannot claim for purchases made over the maximum level of £200k. Something to consider if you’re planning a large investment.
Read more here about the temporary increase and ask your tax adviser about using the AIA to claim tax relief for your business.
It’s worth being aware that if you sell your equipment after claiming AIA, you many need to pay some of the tax relief you have received. Read more here about disposing of assets that you’ve claimed capital allowances on.
The importance of timing
Whilst replacing faulty equipment isn’t something you plan for, timing other major investments is crucial to maximising tax relief, particularly if you are a sole trader or partner, where tax rates are more punitive.
For example, if a sole trader commits to a £48,000 purchase prior to 5 April 2020, the £19,200 tax relief is enjoyed from the January 2021 tax bill (assuming they are a 40% tax payer).
If the purchase fell in May 2020, the relief would be delayed a further 12 months until January 2022. This means HMRC has nearly £20k extra in their pockets for an additional 12 months because the purchase was delayed, in this case, by only a few days.
In cases where you’d like to invest early but have other commitments, you could consider a low start finance agreement.
For example, you could pay a token payment of say £10 per month for the first three or six months. This eases your way into the agreement but also allows you to claim AIA from the start date and therefore advance your tax relief. And of course use the equipment sooner too.
It’s a great to maximise your benefits and squeeze the most out of HMRC.
Can I lease my equipment and claim AIA to offset my tax?
Usually a lease is not allowable under AIA rules as the repayments themselves are tax deductible instead.
However, Performance Finance has a very clever product called a Long Funding Lease. It allows you to spread your VAT over the finance term and claim immediate capital allowances via the AIA.
For many businesses, the spreading VAT has no real relevance as they can reclaim VAT fully each quarter. However, for partially exempt businesses such as opticians, claiming AIA and spreading VAT can be incredibly beneficial
Get in touch with Performance Finance if you’d like to find out more.
01536 52 96 96
Please note that Performance Finance are not tax advisers so please seek qualified advice.