“‘I am looking to buy some computer equipment for my business shortly and I have heard that there is something called the Annual Investment Allowance that allows me to claim the tax back on this – can you explain how this works?”

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The annual investment allowance (AIA) is an allowance on capital expenditure that has been in place for a number of years. The term capital expenditure refers to costs to purchase or improve a long-term asset in the business such as computer or office equipment. It does not include land or buildings in this case.

At present, in any one tax year a self-employed individual or a company have an annual investment allowance available to them of £500,000 (to reduce to £25,000 on 1st January 2016) – this means that the first £500,000 of capital expenditure that qualifies for the annual investment allowance gets full tax relief.

If, in the above example, the business made a taxable profit before the purchase of the computer equipment of £50,000 in the tax year and the computer equipment purchases total £4,000 the taxable profit in this case would be reduced to £46,000.

If capital expenses do not qualify for the annual investment allowance or in any tax year exceed the allowance available then they attract a writing down allowance of only 8% per annum. Examples of capital purchases which do not qualify for the annual investment allowance include (but are not limited to):

  • Cars
  • Items gifted to the business

There are other issues surrounding self-employed individuals or partnerships that have some business assets which have a private use element. In this case the amount claimed is reduced according to the percentage of private use that is attributed to the asset.

If a capital item is sold that has attracted either the annual investment allowance or writing down allowances there are further rules associated with this that could be tax affecting.

The purchasing of assets can be quite a complicated area and we suggest seeking professional advice before making any major purchase.