Annual investment allowance – to share or not to share?
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
28 July 2023
Following the recent changes to capital allowances in the spring Budget, here’s a reminder of the annual investment allowance (AIA) rules for those businesses who are unable to take advantage of the new full expensing relief for companies.
The spring Budget introduced the concept of full expensing, which will provide 100% tax relief on expenditure on qualifying new and unused plant and machinery by companies from 1 April 2023 onwards. Full expensing is not available on plant and machinery additions or assets purchased for leasing purposes, along with other exclusions in section 46 CAA 2001.
Unincorporated businesses are unable to qualify for full expensing, however they (along with companies with expenditure that is not eligible for full expensing) can seek to rely on annual investment allowance (AIA) to secure 100% tax relief up to the annual limit, subject to the AIA criteria being met. Section 8 of the Finance (No 2) Act 2023 confirms the announcement in the 2022 mini-Budget that the annual limit will remain at the temporary £1 million per year indefinitely.
Expenditure on cars does not qualify for either full expensing or AIA. Our recent article outlines the special rules on the capital allowances available on cars and the definition of a car for these purposes.
Who can claim AIA?
Section 38A CAA 2001 outlines who can claim AIA. It can only be claimed by a “qualifying person”, defined as an individual, a partnership of which all the members are individuals or a company. This means that, for example, a partnership that has a company or trust as a partner is unable to claim AIA.
There are however special rules where businesses must share the AIA annual limit. These apply to businesses under common control.
Groups of companies
A group of companies is only entitled to a single AIA annual limit. The legislation does not stipulate how the AIA limit should be allocated. Section 51C CAA 2001 gives the companies full flexibility as to how to allocate the AIA annual limit between the group.
Where there are two or more groups of companies under common control, they will only be entitled to a single AIA annual limit between them if they are ‘related’ to each other as per Section 51D CAA 2001. Again, full flexibility is given in the legislation in terms of how the AIA annual limit is shared between the groups of companies.
Other businesses under common control
Section 51E CAA 2001 extends the requirements for companies to share a single AIA annual limit beyond those who are members in a group. Where companies are not in a group, but are under common control, they may also be required to share a single AIA annual limit where they are ‘related’ to each other.
Unincorporated businesses who are under common control and are ‘related’ to one another are required by Section 51H CAA 2001 to share a single AIA annual limit with each other.
It is important to note that while companies under common control may need to share a single AIA annual limit and unincorporated businesses under common control may need to share a single AIA annual limit, there is no requirement for companies to share a single AIA limit with unincorporated businesses or vice versa. For example, this means that if you as an individual are a partner in a partnership (provided that the members of the partnership are all individuals) and hold shares in a company, both the partnership and the company should be able to claim AIA subject to other eligibility rules.
What is meant by control for this purpose?
Section 51F CAA 2001 (companies) and Section 51I CAA 2001 (unincorporated businesses) outline what is meant by control for the purposes of sharing the AIA annual limit. They use the definitions outlined in Section 574 CAA 2001.
Control of a company is based on the ability of the affairs of the company to be carried out in accordance with a person’s wishes. This takes account of both voting rights or powers in the articles of association or similar document.
Control of a partnership is based on the right to a share of more than half of the assets, or of more than one-half of the income, of the partnership. Section 51I CAA 2001 further explains that if you and your partners control one partnership between you, and you also control another partnership, both of these partnerships will be treated as controlled by the same person.
When would businesses be ‘related’ with each other?
Section 51G CAA 2001 (companies) and Section 51J CAA 2001 (unincorporated businesses) explains when companies or unincorporated businesses would be related with each other. This would happen in two situations: The shared premises condition or the similar activities condition.
A company is related to another company, or an unincorporated business is related to another, if they operate from the same premises at the end of the chargeable period.
The similar activities condition concerns whether the businesses are carrying out activities under the same “NACE classification”, which is defined in Section 51G CAA 2001 as the first level of the common statistical classification of Regulation (EC) No 1893/2006 of the European Parliament. Even though the UK has left the European Union, the NACE criteria remains unchanged.
Where two or more companies (or groups of companies), or two or more unincorporated businesses, have more than 50% of their turnover from the same NACE categorisation, this will meet the similar activities condition.
Allocating the AIA annual limit when it needs to be shared
While the legislation allows businesses to decide how to allocate the AIA annual limit when it needs to be shared, it would normally be desirable to allocate the AIA to qualifying expenditure in the special rate pool before the main pool given the difference in the rates of writing down allowance.
If your company isn’t using full expensing, when allocating the AIA annual limit you can also take account of the profit thresholds for the 25% corporation tax rate as applied to the company’s situation (which will vary depending on the number of associated companies), as well as the applicable thresholds for corporation tax quarterly instalments.
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