The Annual Investment Allowance (AIA) was first introduced in The 2008 Finance Act and the legislation was incorporated into the Capital Allowances Act 2001. The AIA is designed to give 100% first year tax relief for qualifying expenditure on plant and machinery. It can be claimed by an individual, partnership or company carrying on a trade, profession or vocation, a UK non residential property business or a furnished holiday lets business. Only partnerships or trusts with a mixture of individuals and companies in the business structure are unable to qualify for AIA.

In the current fiscal year capital expenditure of up to £100,000 may qualify for a 100% deduction in calculating taxable profits. However, as announced back in the 2010 emergency budget, the AIA will be reduced from £100,000 per annum to £25,000 per annum from 6 April 2012 for unincorporated businesses, and from 1 April 2012 for companies. If the basis period straddles 1 April for companies, or 6 April for unincorporated entities, the AIA must be time apportioned accordingly.

There is still a small window of opportunity for businesses to take advantage of the £100,000 limit. However, the timing of capital expenditures is important and businesses are strongly advised to take proper advice before deciding on the timing of a purchase.