Designed as a way to incentivise businesses into making large-scale capital investments, the AIA has been raised and lowered frequently during recent years. It started at 50,000 on its introduction back in April 2008, and was then doubled to 100,000 two years later. In April of 2012 it was knocked back down to 25,000, before a surprise move in December of the same year saw it increased ten-fold. From April 2014 it was doubled again to 500,000, with an expiry date on that figure set as 1 January 2016.
The AIA allows companies to claim 100 per cent tax relief on most plant and machinery expenditure in the year it is incurred up to the annual limit. Where businesses spend more than the annual limit, any additional expenditure will continue to receive tax relief through capital allowances entering either the main rate or the special rate pool, where it will attract writing down allowances at 8 per cent or 18 per cent.
Read more about the AIA:
- What is the Annual Investment Allowance
- Annual Investment Allowance cuts loom
- Less than a year left to benefit from increase in AIA
In his speech to the House of Commons, Osborne highlighted the expiry date of the current level, but said it was an issue which would make more sense to come back to during the Autumn Statement in December. However, he did say: I am clear from my conversations with business groups that a reduction to 25,000 would not be remotely acceptable and so it will be set at a much more generous rate.
Earlier in the week, BNP Paribas Leasing Solutions came out and declared that AIA plays a crucial role in encouraging businesses to make big capital investments. It calculated that delaying and then missing the 31 December deadline could cost up to 389,500. The last reduction in the AIA was found to have brought about a 1.5bn fall in the amount of tax relief claimed on capital spending.
The British Chambers of Commerce (BCC) has also indicated its support for the AIA, calling for it to be set at 500,000 indefinitely . The business organisation added it was time the government acknowledged that by forgoing some tax receipts in the short term it will reap the rewards later .
Adam Longmore, director of corporate tax services at Clement Keys, said: He has gone some of the way but not all the way here. Businesses will be relieved to hear that the AIA will not be falling back to 25,000 in January, but they will need to know the new rate of allowance as soon as possible to plan ahead with any certainty. He has left businesses hanging and they need clarity in order to prepare long-term capital investment plans.