Policy paper

Legislating the Annual Investment Allowance (AIA) at £1m

Published 15 March 2023

Who is likely to be affected

Businesses investing more than £200,000 in plant and machinery from April 2023.

General description of the measure

This measure will permanently increase the limit of the annual investment allowance (AIA) from £200,000 to £1,000,000 for qualifying expenditure on plant and machinery incurred from 1 April 2023.

Policy objective

This measure is intended to have positive outcomes for businesses by supporting and encouraging business investment and by simplifying the tax relief for such investment.

Background to the measure

At Summer Budget 2015, the permanent level of the AIA was set at £200,000 with effect from 1 January 2016. At Budget 2018, the level was temporarily increased to £1,000,000 for two years from 1 January 2019. On 12 November 2020, this was extended by a further year. At Autumn Budget 2021, this was further extended until 31 March 2023 to align with the end date for the super-deduction.

The super-deduction and an accompanying special rate first-year allowance were introduced at Spring Budget 2021, temporarily providing enhanced rates of relief for companies chargeable to corporation tax for qualifying expenditure on certain plant and machinery assets up to 31 March 2023.

Detailed proposal

Operative date

The measure will have effect in relation to AIA qualifying expenditure incurred from 1 April 2023.

Current law

The AIA was introduced from April 2008, which most businesses, regardless of their size and subject to certain conditions (specified below), can claim on their qualifying expenditure for plant and machinery. Its permanent level was set at £200,000 from 1 January 2016.

A temporary level of £1,000,000 was introduced for a two-year period with effect from 1 January 2019 implemented through section 32 Finance Act 2019. This temporary level was extended by a further year to 31 December 2021 through section 15 Finance Act 2021 and then was extended again to 31 March 2023 through section 12 Finance Act 2022.

The AIA is a 100% capital allowance for qualifying expenditure on plant and machinery up to a specified annual limit. The capital allowances legislation in respect of AIA is at sections 38A, 38B, and 51A-51N of Capital Allowances Act 2001 (CAA01).

Businesses claim the AIA in respect of expenditure which would otherwise be eligible for writing down allowances (WDAs). Given at either the main or special rates, WDAs provide relief for eligible capital expenditure over a number of tax periods. The AIA therefore accelerates relief, typically simplifying processes for businesses and aiding their cashflow.

AIA is not available for all capital expenditure on plant and machinery, such as expenditure on cars. Further details on the categories of capital plant and machinery expenditure that do not qualify for AIA are set out in section 38B CAA01.

Proposed revisions

Legislation will be introduced in the Spring Finance Bill 2023 to increase the permanent AIA level to £1,000,000.

It will also repeal the transitional rules applying to chargeable periods which straddle 1 April 2023 when the temporary £1,000,000 increase in the AIA level was set to end, which are contained within paragraph 2 Schedule 13 Finance Act 2019 (as amended by section 15 Finance Act 2021 and section 12 Finance Act 2022) and are no longer required.

Summary of impacts

Exchequer impact (£m)

2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
-290	-1,015	-1,555	-1,495	-1,435	-1,360

These figures are set out in Table 5.1 of Autumn Statement 2022 and have been certified by the Office for Budgetary Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2022.

Updated estimates consistent with Spring Budget 2023 forecasts can be found in Table 4.2 of Spring Budget 2023.

Economic impact

By making the relief on qualifying expenditure up to the £1,000,000 limit permanent, this measure will provide an incentive for businesses to increase their capital expenditure on plant and machinery. The OBR estimated this has a small positive effect on the level of business investment in their November 2022 Economic and Fiscal Outlook.

Impact on individuals, households and families

The measure is not expected to impact on individuals as it only affects businesses investing more than £200,000 in plant and machinery from April 2023. This measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not expected that there will be adverse effects on any group sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on an estimated 31,000 businesses by making available an increased level of relief for expenditure on plant and machinery at 100% of the cost for the tax period in which it was incurred.

One-off costs will include businesses having to familiarise themselves with the change and could include updating software as a result of the change. There are not expected to be any continuing costs.

Continuing savings could include businesses not having to calculate relief available through WDAs in future tax periods against the purchase costs of their plant and machinery covered by the increased amount of AIA available.

Small and micro business (SMB) assessment: the permanent increase in the AIA is expected to benefit the largest SMBs whose investments in plant and machinery regularly exceed the permanent £200,000 AIA limit. Without this change these businesses could only relieve their relevant capital expenditure through WDAs at a lesser rate.

Customer experience could see an improvement as calculating capital allowances for plant and machinery purchases will be simpler.

This measure is not expected to impact on civil society organisations.

Operational impact (£m) (HMRC or other)

This measure will require changes to HMRC IT systems and guidance, the costs are estimated to be £2,500,000.

Monitoring and evaluation

The measure will be monitored through information collected of claims for the AIA in tax returns and through engagement with businesses and their representative bodies.

Further advice

If you have any questions about this change, please contact HMRC on email: [email protected]