Annual Investment Allowance

Thinking of investing in some new equipment for your care business? Andrew Law, Senior Manager, Tax Consulting at Albert Goodman, explains how this can be doubly beneficial by utilising the Annual Investment Allowance.

Any business needs to invest in the equipment required to carry on its trade. That might be as simple as a laptop or as significant as a processing plant, and it varies from business to business. Whatever the scale of business the annual investment allowance (AIA) provides a significant tax incentive to invest in your business.

As a general principal capital expenditure is not allowed as a deduction from the profits of the business for tax purposes. Instead, tax relief is given as a ‘capital allowance’ and the rate of that allowance depends on the type of asset you invest in. ‘Plant and machinery’ is the main category and includes all the furniture and equipment you need to run your business. It does not include buildings which have a different allowance (structures and building allowances) but it can include some of the things fitted to a building like heating and ventilation systems.

The AIA provides that the first £1 million p.a. of expenditure on plant and machinery will qualify for a 100% tax deduction, so the whole cost is allowed against profits in the year the expenditure is incurred.

Some assets are excluded from AIA and we have already mentioned buildings. The most common which clearly comes under the heading of ‘machinery’ will be cars. AIAs can never be claimed on the purchase of a car, and instead the special rules for cars applies. Some electric cars can attract a different 100% allowance, known as a first year allowance, but that is outside of the AIA.

Where there are several businesses which are under common control, they share a single AIA but they are free to split it between them as they see fit. So, a group of companies will only be able to claim AIA on the first £1 million of capital expenditure across the group as a whole.

The previous legislation said that the AIA would reduce to £200,000 with effect from April 2023. The mini budget extended the £1 million limit indefinitely, and this was confirmed as part of the Autumn Statement in November. The legislation for this is expected to be passed shortly.

Most businesses will find £1 million capital expenditure to be more than enough to meet their needs but it is worth ensuring the expenditure is timed to obtain the relief as early as possible. It is worth reviewing your capital expenditure budget to maximise the relief available.