Research and analysis

Annual Investment Allowance Efficacy Review

Published 28 May 2025

Prepared by IFF Research for HM Revenue and Customs. The views in this report are the authors’ own and do not necessarily reflect those of HM Revenue and Customs

HM Revenue and Customs (HMRC) Research Report 778

1. Glossary  

Term	Description
Capital allowances	These can be claimed by a business when assets are purchased for qualifying business use (for example equipment, machinery, business vehicles). Businesses using the allowances can deduct some or all of the value of the item purchased from profits before they pay tax.
First year allowances	If a business buys an asset that qualifies for first year allowances (also known as enhanced capital allowances) they can deduct the full cost from their profits before tax. These can be claimed in addition to annual investment allowance (AIA) and includes allowances for: Energy-saving equipment (expenditure on energy-saving plant or machinery (only available until 2020)); Water-saving equipment (expenditure on environmentally beneficial plant or machinery); Low emission vehicles (expenditure on cars with low CO2 emissions); Gas refuelling stations (expenditure on plant or machinery for use on gas refuelling equipment); Zero-emission goods vehicles (expenditure on the purchase of qualifying vehicles); Enterprise Zones (investment in designated assisted areas); Electric charge-points (equipment for charging electric vehicles)
Writing down allowances (WDA)	A type of capital allowance in which the business deducts a percentage of the value of an item from their profits each year; the percentage deducted depends on the item [footnote 1].Writing down allowances can be used if a business has already claimed AIA on items worth a total of the AIA limit, or if an item does not qualify for AIA (for example, cars, gifts or things owned before they were used in the business[footnote 2])
Research and development allowance (RDA)	RDA gives relief for capital expenditure on research and development incurred by a business.

2. Executive Summary  

2.1 Introduction  

The Annual Investment Allowance (AIA) is a relief that can be claimed by businesses on the cost of plant and machinery. At the time this research was conducted, a business could claim up to 100% of an investment up to a value of £200,000 to help reduce the potential tax liability for that business^{[footnote 3]}.   

AIA is an incentive for businesses to invest because it accelerates the tax relief available, allowing the business to claim the entire relief in the year of investment, rather than over several years, thus helping a business’s cash flow. It also aims to simplify tax. The majority of UK businesses have qualifying expenditure less than £200,000, so they can write this off without having to make writing down allowance calculations every year.   

IFF Research was commissioned by HMRC to:  

• gather evidence regarding the efficacy of the Annual Investment Allowance and the extent to which AIA is taken into consideration when investments are made  

• confirm whether or not AIA is meeting its aims of increasing investment and simplifying tax affairs  

The research comprised of qualitative interviews with 16 claimants of AIA from the 2015 to 2016 tax year, 3 non-claimants, and 2 interviews with ‘non-informed’ claimants to explore the reasons for not claiming AIA and any differences in their investment behaviour^{[footnote 4]}.  Fieldwork was conducted between April and June 2018.  

This is qualitative analysis, intended to understand individuals’ circumstances, attitudes and behaviour in depth and detail, rather than to be ‘representative’ of the underlying population or measure the incidence of these attitudes/behaviours. Results therefore show a range of opinions and give an indication of the in-depth reasons for these opinions or the individual circumstances surrounding them. The interviews achieved are not intended to be fully representative of all small and medium sized enterprises (SMEs).  

2.2 Background on investments  

Businesses were asked several questions about their general investment activity and behaviour over the last two tax years (including investments not covered by AIA).  Investments in IT software and equipment such as computers and printers were common among both claimants and non-claimants. Other purchases included fixtures and fittings, vehicles, as well as job-specific equipment,  for example, a power washer for a mining and quarrying business and grinding equipment for a manufacturing business.    

Businesses used many sources of funding for their investments including reinvesting company profits, bank loans or third-party finance or part-exchange as well as capital allowances, while some of the non-claimants also mentioned using overdrafts and credit cards. Regarding capital allowances, businesses tended to rely on their tax agents to seek out tax relief opportunities, and to claim these on the businesses’ behalf.  

Investment decisions were largely driven by the need for specific equipment. However, certain events often prompted investment activity (such as an office move, staff recruitment, a new project or regulatory requirements). For example, businesses frequently mentioned making regular investments, although some were more ad-hoc. Although less common, there were also examples of businesses having more sophisticated spending strategies, either to align with business growth objectives, or operationally to provide a formal schedule for replacing equipment.  

2.3 Awareness of AIA  

Businesses often lacked awareness of AIA. Some claimants could not speak knowledgeably about AIA because they were removed from the process, relying on their agents to seek out tax relief opportunities on their behalf. Given that it was important to speak with claimants who could speak knowledgeably about their reasons for using AIA, the sample of claimant respondents was focused towards those with higher levels of knowledge, although respondents did still struggle to speak knowledgeably on all topics. It is therefore important to note that when discussing awareness and knowledge of AIA the findings are not representative of the claimant population.   

Generally claimants knew what AIA covered, what the annual limit was and what the purpose was (encouraging investment to stimulate growth), although some had misconceptions, such as AIA being targeted towards specific sectors.  

Claimants generally first learnt about AIA via their accountants, typically at the point they needed to make an investment. The accountants often took responsibility for claiming AIA on behalf of the business. A handful of businesses mentioned hearing about AIA via other sources including trade magazines and letters from HMRC.  

Awareness levels were lower among non-claimants and non-informed claimants, ranging from very basic knowledge to not having heard of the relief at all.  

2.4 Claiming AIA  

Although informed claimants generally took advantage of the AIA each year, respondents were generally unable to comment on the process of claiming AIA (mainly because their agents took responsibility for making the claim). Some perceived it to simplify their tax affairs (based on agent feedback) as it could be claimed in a single tax year, as opposed to over several years.  

AIA tended to be preferred to other capital allowances because it could be claimed in full in the year of investment, whereas other capital allowances were carried over to future tax years. Therefore, claiming AIA provided cash flow benefits to claimants. Other capital allowances were however used in cases where AIA was not applicable (for example on the purchase of company cars)  

The main reason given for not having claimed AIA by non-claimants was simply a lack of awareness. Non-informed claimants believed they had not had an opportunity to use AIA yet, but would consider doing so in the future.  

2.5 Impacts of the AIA  

In terms of whether AIA drives investment decisions, informed claimants tended to say they would have invested even if AIA was not available, due to their investments being driven by the immediate needs of their business. Some only became aware of AIA after making their investment, demonstrating that the decision to use AIA can be an afterthought rather than a driver of investment. Businesses commonly mentioned that they claimed AIA simply because it was available and it would be considered illogical not to take advantage of a tax relief.   

While there was only one case where a claimant said they could not have invested at all without AIA, there was evidence that AIA influenced the timing and quantity of investments. For some it affected the timing of their investments by encouraging them to bring forward investments in order to maximise the tax relief available. For others, the extra cash meant they could invest more, either in terms of a larger quantity of purchases or by purchasing a better product.  

Other impacts cited as a result of the cash-flow benefits included being able to reinvest the additional cash into the business, a reduced dependency on borrowing, and in some cases increasing dividends paid to employees. Investments for which AIA had been claimed also had benefits, including allowing businesses to modernise, increases in efficiency and improvements in service and company image.  

2.6 Future interest in using AIA  

When asked how they felt about the annual AIA limit (which was still £200,000 at the time of interview), claimants and non-claimants generally felt it was sufficient, although some of those with higher spend felt the limit should be higher, with some businesses suggesting £500,000 as a suitable level to encourage investment. However, it is worth noting that medium-sized businesses, likely to have higher levels of investment, were under-represented in this research.   

After learning more about AIA having taken part in the research, claimants with lower levels of awareness of AIA were interested in expanding their use of AIA, while non-informed claimants and non-claimants were also interested in exploring its use further.  

3. Introduction  

3.1 Background to the research  

The Annual Investment Allowance (AIA) is a relief that can be claimed by businesses on the cost of plant and machinery. Up to 100% of an investment up to a value of £200,000 (at the time the research took place ^{[footnote 5]}) can be claimed to help reduce the potential tax liability for that business. The limit at the time the research took place meant that AIA was of greatest benefit to small and medium sized enterprises (SMEs) and those whose investments were around the level of the AIA limit.  

AIA is an incentive for businesses to invest because it accelerates the tax relief available so it can all be claimed in the year of investment, rather than over several years, thus helping a business’s cash flow. It also simplifies tax; most UK businesses have qualifying expenditure less than £200,000, which meant that they could write this amount off without having to make writing down allowance calculations every year.   

3.2 Research aims and objectives  

HMRC commissioned research with investment decision makers in SMEs to better understand their investment decisions and the impact that AIA has on their business.  

The core objectives of the research were:  

• to gather evidence regarding the efficacy of the Annual Investment Allowance and the extent to which AIA is taken into consideration when investments are made  

• to confirm whether or not AIA is meeting its aims of increasing investment and simplifying tax affairs  

3.3 Methodology  

The research used a qualitative approach, as it gave scope to build rapport with respondents and thus encourage openness about how their businesses behaved regarding their tax affairs and their use (or non-use) of AIA. In total, 21 interviews were conducted (16 claimants of AIA, 3 non-claimants, and 2 interviews with ‘non-informed’ claimants). Interviews, lasting up to 60 minutes, were conducted with the owner, managing director, or the finance director or controller of the business. Businesses interviewed ranged in size, however, over half were small businesses (10 to 49 employees). Medium-sized businesses (50 to 249 employees), likely to have higher levels of investment, proved harder to achieve interviews with than small businesses. As such, they were under-represented in this research.  

All interviews were conducted face-to-face, apart from one interview which was conducted by telephone at the request of the respondent. Interviews took place between April and June 2018. The topic guide for claimants can be found in Appendix B of this report and the non-claimant topic guide in Appendix C.  

The sample of AIA claimants all claimed AIA in the 2015 to 2016 tax year. For the non-claimants, the sample was supplied from a commercial provider and respondents were screened to ensure they had made investments but not claimed AIA in the last two years (2016 to 2018).  

Recruitment for the research proved to be challenging due to the following reasons. The first being a lack of awareness or personal engagement with AIA among decision-makers. This was because of their high reliance on agents to manage this process on their behalf. These businesses were unsuitable for interview as they were unable to speak knowledgeably about their reasons for claiming AIA and were screened out during recruitment. The other reason being the lack of direct business engagement with AIA was further evidenced by sample churn between the claimant and non-claimant groups. For instance, two businesses originally recruited for the research as claimants, explained at the point of interview that they did not believe they had recently claimed AIA, and were therefore asked questions from the non-claimant topic guide. These businesses are referred to as non-informed claimants throughout this report. Similarly, due to their uncertainty, two businesses recruited as non-claimants subsequently found out, after checking with their accountants, that they had claimed AIA and were therefore interviewed as such. Table 3.1 below specifies the three types of respondents and the topic guide used for interviewing. 

Table 3.1 Respondent type interviewed  

Type of respondent	Number of interviews	Topic guide
Informed claimants	16	Claimant
Non-informed claimants	2	Non-claimant
Non-claimants	3	Non-claimant

3.4 Profile of businesses interviewed  

Interviews with informed claimants were achieved across a variety of sectors, as shown in Table 3.2, as well as a variety of geographical regions.   

Table 3.2 Sectors of businesses interviewed  

Sector	Informed claimants	Non-informed claimants	Non-claimants
Mining and quarrying	1	0	0
Manufacturing	4	1	1
Electricity, Gas, Steam and Air Conditioning	1	0	0
Construction	0	1	0
Wholesale and Retail Trade; Repairs	2	0	0
Transport and Storage	2	0	0
Information and Communication	2	0	2
Finance and Insurance	2	0	0
Education, Health and Social Work	2	0	0
Total	16	2	3

Table 3.3 shows the size profile of businesses interviewed. It is worth noting that most of the businesses interviewed employed between 10 and 49 employees, so findings may best represent the views of smaller rather than medium-sized businesses.  

Table 3.3 Size of businesses interviewed  

Sector	Informed claimants	Non-informed claimants	Non-claimants
Sole traders	0	0	0
Micro (1 to 9 employees)	1	0	2
Small (10 to 49 employees)	10	2	1
Medium-sized (50 to 249 employees)	5	0	0
Total	16	2	3

3.5 Reporting note 

This is qualitative analysis, intended to understand individuals’ circumstances, attitudes and behaviour in depth and detail, rather than to be ‘representative’ or measure the incidence of these attitudes or behaviours. Results therefore show a range of opinions and give an indication of the in-depth reasons for these opinions or the individual circumstances surrounding them. The interviews achieved are not intended to be fully representative of all SMEs .

4. Background on investments  

The research explored investment activity, regardless of whether AIA had been claimed, among participating businesses in the last two years. This included the types of investments businesses made; influences behind the timings of these investments and how these investments are financed in order to build a picture of typical investment behaviour.   

4.1 Types of investments made  

The most common type of investment among all claimants was IT software and equipment such as computers and printers. Other investments included fixtures and fittings, vehicles such as vans and lorries, and job-specific equipment and tools, for example a power washer for a mining and quarrying business or grinding equipment for a manufacturing business.   

Purchases varied greatly in value, ranging from less than £1,000 to several hundred thousand pounds. Discussions revealed that larger spends were more likely to be a result of certain events; for example, moving premises. There were instances of large sums being spent on specific equipment, or example £860,000 on four coaches by a transport business. However, IT equipment was purchased more regularly and often had a high cumulative cost.  

Similar findings were evident among non-claimants in terms of the types of purchases made and the amount spent on these investments. Common investments included computer hardware and software, as well as job-specific equipment such as a 3D laser scanner for a manufacturing business. 

4.2 How investments are financed  

Respondents were asked how they finance their investments, which revealed various funding streams. These included reinvesting company profits, a loan from the bank or finance from a third-party lender, and part exchange:   

“Typically, the engineering [or operations] team would come with a proposal if they needed additional capacity or to replace an item of equipment that was worn out or uneconomical to continue to run… I would look at the finances of the company and decide if we acquire it directly or finance it.” Informed claimant, 50 to 249 employees, Manufacturing  

In terms of capital allowances accessed by businesses, they had commonly claimed writing down allowances, some had claimed the Research and Development allowance, and one had claimed first year allowances, with these allowances often being claimed alongside AIA. Businesses tended to rely on their agents to seek out tax relief opportunities and claim any available allowances, leading to lower levels of awareness of which allowances they had claimed ^{[footnote 6]}.   

Informed claimants claimed AIA on a variety of their investments, including IT equipment, office equipment, company vehicles, as well as job-specific equipment.  

Non-claimants funded their investments in similar ways to claimants, through reinvesting company profits, finance agreements, overdrafts, credit cards, or PayPal working capital. One non-claimant reported that access to finance had a significant impact on the business’s ability to invest; most of their investments were financed under hire purchase finance agreements.   

4.3 Investment behaviour  

For both claimants and non-claimants, the timing of investments was largely driven by the immediate needs of the business, for example business refurbishments or expansion, to replace old or damaged equipment, or to keep up-to-date with new technology in order to remain competitive:  

“I suppose I would say an operational need [drives the timing of investments]… a business need and concern of the old system falling over.” Informed claimant, 10 to 49 employees, Education, Health and Social Work  

However, some investments were the result of a particular event, for example an office move or new employees starting, which also linked to the businesses’ growth objectives:  

“Growth. We took on quite a few staff in that year and it made sense to bulk buy the licensing [it was] more cost effective.” Informed claimant, 50 to 249 employees, Wholesale and Retail Trade, Repairs  

Other events that resulted in investment included winning a new project which required specific equipment to be purchased in order to deliver the contract, or responding to new regulation; for example, updating company vehicles to adhere to environmental regulation and purchasing IT equipment to move to a digital system due to GDPR.  

Although sometimes the spend on investments was more regular in nature (for example refreshing equipment as and when needed) and not always planned, some businesses stated they were more deliberate in the way they timed investments. They phased investments so that they are able to manage their organisation’s cash flow:  

“We tend not to buy machinery in advance of when we need and leave it until as close as we can to when we actually need it… We [also] try to phase the financing.  As we take out asset finance on a machine, I like to try and pay it off before we buy another one if possible.” Informed claimant, 50 to 249 employees, Manufacturing  

Some businesses reported being more likely to invest at certain points in the year; for example one business said they made investment decisions during the summer months because their tax year ended in August:  

“Our tax year ends 31st August, so we tend around this time to think if there is any capital we are going to spend with an eye towards the end of the company year.” Informed claimant, 10 to 49 employees, Education, Health and Social Work  

Some businesses had more strategic spending plans in place. These aligned with wider business growth plans or formed part of a formal schedule for replacing equipment or machinery.  

“All the purchases are part of the 3 to 5 year plan for the business which is driven by turnover. Within that plan we have got little stepping stones and site consolidation was one, new software is another.  These are all projects that will be done to keep the business well-resourced and moving through strategic goals.” Non-informed claimant, 10 to 49 employees, Manufacturing  

4.4 Summary 

The most common types of investments among all respondent groups, regardless of whether AIA had been claimed, were IT software and equipment such as computers and printers. The value of purchases varied from less than £1,000 to several hundred thousand pounds.  

Businesses reported claiming a range of capital allowances, with tax relief opportunities usually being sought by agents of their behalf.  

The timing of investments tended to be driven by the immediate needs of the business, including business expansion, refurbishment, and replacing or updating equipment. However, particular events could also prompt investment (for example new projects, office moves). Some businesses were more strategic in their approach to making investments. This included deliberately timing investments for cash flow purposes or aligning their purchasing with formal spending plans.

5. Awareness and knowledge of AIA  

The research explored the extent to which businesses were aware of AIA, including understanding its purpose, how it works, and what its limitations are, to provide further insight into how, if at all, AIA is taken into consideration when an investment is made.  

5.1 General awareness of AIA  

The recruitment phase of this research demonstrated that businesses often lacked awareness about AIA. Many businesses could not speak knowledgeably about AIA because they were detached from the process and relied on their agents to seek out suitable tax reliefs and make the claims on behalf of the business. In some cases, senior figures in businesses recorded as claimants by HMRC were unaware that they had claimed AIA at all. Given that it was important to speak with claimants who could speak knowledgeably about their reasons for using AIA, the sample of claimant respondents was focused towards those with higher levels of knowledge.  

Agent involvement in decision-making surrounding investments was still prevalent among participants. Many informed claimants were first made aware of AIA through their tax agents. Businesses infrequently mentioned learning about AIA through other channels such as trade magazines and HMRC letters. Claimants learnt about AIA at different points in time; some believed that they had been aware of AIA since its introduction, while others recalled it being brought to their attention after the limit was increased ^{[footnote 7]}.  Some reported that AIA was brought to their attention after the point of purchase when they had decided to make an investment.  

“[First heard about AIA] twelve years ago probably when we started to purchase newer vehicles and the tax bill was due. By spending some of the profits [we could] utilise the tax rather than pay the tax and get assets… [it was] probably [mentioned] at the review of the annual accounts.” Informed claimant, 10 to 49 employees, Transport and Storage  

Generally, both informed and non-informed claimants interviewed demonstrated high levels of awareness about AIA’s coverage, mentioning that it could be used for ‘plant and machinery’ and some mentioned the exclusion of cars ^{[footnote 8]}.  In some cases knowledge was more limited; for example, one business in the IT sector was only aware that AIA could be used for IT equipment. One Finance and Insurance claimant however, mentioned being more familiar with AIA’s coverage than that of other capital allowances.  

“I am familiar with what is covered by AIA and I broadly know where there are restrictions (purchases from connected parties). I am less familiar on some of the other reliefs available for capital investment, for example environmentally friendly stuff.” Informed claimant, 10 to 49 employees, Finance and Insurance  

Informed and non-informed claimants also tended to have good awareness of the current AIA annual limit of £200,000, although a couple of informed claimants thought the limit was £250,000. Some were aware that the AIA limit had changed several times in recent years.  

Overall, awareness levels in general were lower among non-claimants, some of whom were either not aware of AIA at all or had very limited awareness. These businesses reflected that they may have in fact been claiming, but because they relied on their agents to seek tax relief opportunities and to claim these reliefs, they could not be sure which capital allowances their business had claimed. One of these businesses, once prompted, recalled being told by their accountant in the past that they could claim tax relief on a laptop purchase and suspected this may have been AIA, but could not be sure.   

5.2 Perceived purpose of AIA  

Businesses that were aware of AIA tended to have a good understanding of its purpose. Businesses generally understood that the government introduced AIA to encourage business investment, in order to stimulate economic growth.  

However, there were also some more nuanced perceptions about AIA’s purpose. Some mentioned it being introduced in response to the 2008 to 2009 recession to help stimulate the wider UK economy. One business, for example, mentioned that reinvesting the relief claimed through AIA would have a chain reaction across supply chains. Some businesses placed additional emphasis on the fact that AIA helped businesses with their cash-flow, although they still highlighted the ultimate intention of stimulating growth.  

“It’s all about the government incentivising investment and making the wheels go around. If I buy a bit of machinery from somebody else then that product has had to be made or someone else is making a profit and they will pay tax on that and then they will offset that by investing in new plant and machinery to make new plant machinery.” Informed claimant, 2 to 9 employees, Mining and Quarrying  

Some businesses mentioned that the aim of AIA was to accelerate investment and encourage investment by allowing the full cost to be claimed in a single tax year.  

“It is an incentive for companies to bring forward investment in equipment, which enhances productivity and increases capacity… ” Informed claimant, 50 to 249 employees, Manufacturing  

In some cases, businesses believed that AIA was targeted towards particular types of business. This included a perception that it was targeted towards smaller businesses, and this was viewed negatively by one business who felt the limit was too restrictive and ‘unfair’ on larger businesses. There were also examples of informed claimants perceiving AIA to be targeted towards certain sectors; for example, one business felt AIA was targeted at manufacturing businesses and another mentioned it being aimed at service industries, to improve the kind of services that we as a country provide. 

5.3 Summary  

Businesses often lacked awareness of AIA because they relied on their agents to seek out tax relief opportunities and to claim these on their behalf, meaning that they were detached from the process.   Informed claimants and non-informed claimants showed high levels of awareness of the AIA’s coverage and the AIA limit of £200,000. Furthermore, they understood its purpose of encouraging business investment in order to stimulate economic growth. Non-claimants had lower levels of awareness of the AIA. 

6. Claiming AIA  

The following section explores how businesses found the process of claiming AIA and how the AIA interacts with other capital allowances. The purpose of which is to provide insight into whether AIA fulfils the objective to simplify tax affairs. This chapter also covers why non-claimants had not used AIA.   

6.1 The process of claiming  

Although informed claimants generally took advantage of AIA each year, frequently they were unable to comment on the process of claiming itself because they were rarely directly involved, with this being dealt with by external agents in most of cases. However, some highlighted that they had not heard any complaints from their accountant regarding the process.   

One business said that their accountant had mentioned problems with claiming AIA when a ‘split year’ occurred, explaining that the timing of an annual limit change in the past had not aligned with the business’ tax year.   

“The accountant did mention the difficulties he has had when it’s a split year. When the AIA limit changes. They change it on the 1st of January when the tax year goes from April to March and that causes problems.” Informed claimant, 10 to 49 employees, Manufacturing  

One informed claimant who was a chartered accountant said it might not be easy for somebody with less financial knowledge to make the AIA claim themselves. One business that had done so had found that it simplified their tax affairs by being able to be claimed in a single tax year, while others assumed or had heard from their accountants that it was easier to claim AIA compared with other capital allowances.   

“[I think AIA is easier to claim than other allowances] Because writing down allowances form a rather large part of the CT return whereas AIA is just a one-liner isn’t it, and once it has gone in the year that is it, nothing to carry forward so it does simplify it.” Informed claimant, 10 to 49 employees, Manufacturing  

6.2 Use of other capital allowances  

AIA was sometimes used alongside other capital allowances including writing down allowances (WDAs), Research and Development Allowance (RDA), and first year allowances (such as for energy-saving equipment and low CO2 emissions vehicles). Some were aware of other types of capital allowances when prompted, although they had not used them.   

Some informed claimants had used other capital allowances in cases where AIA was not applicable; one business believed this was the case for LED lighting purchased, while another mentioned claiming first year allowances on company cars because of AIA restrictions.  

Despite the perceived benefits of AIA over other capital allowances, one business felt they would be more reliant on writing down allowances if the AIA limit dropped. However, if this was the case they believed it would result in them paying higher levels of tax.  

“If AIA dropped down to £25,000 again that balance would go down as the written down allowances again and that would filter through year on year… that would then put us back probably into corporation tax payment territory to the Revenue” Informed claimant, 10 to 49 employees, Manufacturing  

Some businesses were reliant on their agents to share knowledge about the existence and benefit of other capital allowances and appeared to be uninvolved in the process. Some of these businesses stated their assumption that their agents would be exploring tax relief opportunities and claiming them on their behalf.  

“It’s a system that was just done for us by an agent, so we didn’t have any direct involvement, so yes, I’m not really in a great position to comment on that.” Informed claimant, 10 to 49 employees, Electricity, Gas, Steam and Air Conditioning  

“I have basic understanding of capital allowances, writing down allowances, AIA… I pay an accountant to calculate my tax returns and I trust him to take advantage of whatever allowances are available to me.” Informed claimant, 1 to 9 employees, Mining and Quarrying  

The perceived benefit of AIA over other allowances was that the tax relief can by claimed in full in the year an investment is made, whereas other capital allowances had to be carried over multiple tax years, meaning that AIA provided immediate cash-flow benefits to claimants.   

“They [WDAs] are just complicating businesses a bit further. Businesses now have to look up CO2 omissions of a vehicle and that will determine what rate of writing down allowance they are allowed to claim each year on the vehicle.” Informed claimant, 10 to 49 employees, Finance and Insurance  

“AIA, or my understanding of it, is it just brings that forward into the first year… [AIA] does really help if you have just paid out hundreds of thousands of pounds for a new piece of equipment so then getting a CT saving in the same year really helps… that is the only advantage, the cashflow.” Informed claimant, 50 to 249 employees, Manufacturing  

6.3 Reasons for not claiming AIA  

Non-claimants and non-informed claimants were asked why they had not used AIA, in order to understand what was driving this. For example, was non-use due to the size of the potential tax relief, the administration time involved, or not enough awareness about AIA and how it can be used?  

The main reason given by non-claimants was simply a lack of awareness; all were unfamiliar with AIA prior to being contacted to take part in the research, with one noting that they tend to leave such matters to their accountant.   

One non-informed claimant became aware of AIA ten years ago, having covered it during their studies through their Chartered Tax Adviser qualification. They explained that they had not had an opportunity to use AIA so far but would check at the year end with their accountant whether there was an opportunity to do so. Another non-informed claimant mentioned just coming out of a Company Voluntary Arrangement and therefore had not been making large investments. However, they said it was something they would take into account for future investments.  

6.4 Summary

Although informed claimants generally took advantage of AIA each year, they were often not directly involved in the process because their agents dealt with this on their behalf.  

AIA was sometimes used alongside other capital allowances, including WDAs, RDA and first-year allowances. Typically, other capital allowances were used when AIA was not applicable.  

AIA was perceived to provide cash flow benefits because businesses could claim it in full, in the year an investment is made (whereas other capital allowances have to be carried over to multiple tax years).  

The main reason why non-claimants had not used AIA was because they lacked awareness of AIA. 

7. Impacts of AIA  

To better understand AIA’s efficacy in encouraging investment, the research explored what impacts, if any, the availability of AIA had on businesses’ investment decisions and behaviour.  In addition, the research investigated whether actually claiming AIA had any secondary impacts on the businesses.  

7.1 Does it drive investment decisions?  

For informed claimants, AIA was not perceived to have influenced or driven the decision to invest at all. These respondents largely reported that commercial necessity for particular assets was the key driver behind their investment decisions, therefore they would have invested the same amount at the same time, regardless of whether AIA was available or not.  

A small-sized business within the Transport and Storage sector (7.2) demonstrated that AIA does not impact upon their decision to invest. Rather, this business’ need to replace ageing vehicles and ensure compliance with changing legislation was the primary reason for investing in new lorries. However, the business felt that were the AIA limit to increase, that it would have an impact on their decision making.  

7.2 Case study: AIA had no impact on decision to invest 

Who are they?  The director of a small business in Transport and Storage.   Primary duties spanned across finance, accounts, operations, and legislation compliance.  

7.3 Investment and Decision Making  

In the last two years, substantial investments were made in vehicles (around £180,000) and IT (£2,000), purchased through finance and reinvestment of profits.   

Generally, investments were made on an ad hoc basis. Investments are primarily by the need to update vehicles and comply with regulations, therefore, AIA did not impact their decision to invest. The business used an external agent for some dealings with HMRC but also consulted with internal staff over investment decisions. Ultimately, the respondent was the final decision maker.  

 

“We’ll decide whether it’s worth taking the risk for investing in newer vehicles…  whether work we’re going to be buying for is ongoing, or if there a risk that that work might be stopping. Then obviously when, you know, we’ll speak to the accountant maybe, and the finance people, depending on what way we’re financing.” 

Awareness and Impacts  

Given that the respondent demonstrated limited awareness of other allowances and had no substantial investment plans in the pipeline, the current limit was considered to be sufficient. However, recent business growth and the potential for further expansion means they would consider implementing a more structured purchasing plan in place of ad hoc investments, particularly if they anticipated an increase in the AlA limit.   

Investments claimed under the AlA had a positive impact on the business. improving cash flow, enabling reinvestment in other areas (for example, new uniforms), making tax compliance easier, modernising, keeping in line with regulations and, in effect, improving company image while reducing vehicle downtime.   

Despite the AlA, not determining or affecting investments in the past, the respondent would consider the AlA more when planning future investments. Without the AlA, he might consider looking into first-wear allowances on zero-emission goods vehicles.  

“In the past, we’ve gone from one month to the next and now we’re significantly larger, we need to think about things like this. With the work that we’re continuing to do and other new work were starting, that (an increase in the AlA limit) would be probably one of the key ingredients that helps make that decision, really, on when I would buy new trucks “ 

In some cases, the decision to claim AIA was made retrospectively, after learning about its availability through their tax agents. In these examples, this indicates a lack of influence of AIA on investment decision-making. Other claimants, who were at least somewhat aware of AIA, tended to defer the decision to claim capital allowances to their tax agents anyway.  

“No [it did not influence our decision to invest] because we learnt in hindsight.  All the work had been done, and then we were approached to say, ‘Did you know that this scheme works, that this scheme exists and therefore you can get a cost benefit from it?’  So, we became aware in hindsight, which suggests that there is not enough publicity out there about it.” Informed claimant, 10 to 49 employees, Oil and Gas  

The most common reason for claiming AIA was its availability; while not driving investments, it was considered foolish not to take advantage of an available tax relief. One informed claimant commented that the small scale of their investment, and therefore tax relief they stood to gain, was not substantial enough for AIA to have any strategic influence on their investments. Instead, their decision to invest was driven by the current needs of the business. For another claimant, the driving decision behind whether to invest was if the business profits could cover the costs of that investment; while AIA was not the primary influence, it had supported this investment strategy by allowing the business to recoup more of its profits.   

In one case among interviewees AIA had affected the business’s ability to invest. This claimant was particularly dedicated to remaining financially self-sufficient, (such as being reluctant to pay for financial advice or use banks to finance investments). Without AIA in place, this claimant, unwilling to borrow, would have sought other capital allowances available. Consequently, if no alternative was available, the business stated it would have foregone the investment.  

7.4 Case Study: AIA brought forward investments 

Who are they?  The managing director and owner of two micro businesses in the Mining and Quarrying sectors.  The staff and assets of one of the businesses were contracted or hired out to work for the other businesses, where necessary.  

Investment and Decision Making: In the last two years, substantial investments were made in vehicles (£14,000) and machinery (around £150, 000), purchased using company finance and reinvestment of profits.   

Being averse to taking financial risks, the business would not have used banks or loan companies to finance the purchases of new machinery and efficiencies. Tax relief was not a deciding factor for whether to invest, whereas equal consideration was given to business need for assets and the financial position of the business.  

While the respondent was the sole decision maker on investments, an external accountant was employed to calculate tax returns and take advantage of available allowances therein.  

“I have basic understanding of capital allowances, writing down allowances, AlA. I know they are incentives; I pay an accountant to calculate my tax returns and I trust him to take advantage of whatever allowances are available to me. I don’t make a sole decision to spend money purely on what allowances I might get; it is part of the equation” 

Awareness and Impacts  

Despite having a relatively good awareness of other allowances, the respondent was satisfied with solely using AlA, as its limit met current investment levels and matched the current annual profit of £200,000. Furthermore, as the business was not suited for expansion, this further showed that an increased limit would not lead to bigger investment.  

Investments claimed under the AlA had a positive impact on the business: improving efficiency, modernising the business and helping compliance with health and safety regulations.   

AlA also influenced the business to bring investments forward to maximise the tax relief. Without AlA, the respondent would have only made the decision to invest if other incentives were available, due to reluctance to borrow.   

“If I’m in profit and I can afford a machine and it will make us more efficient and more health and safety compliant… that’s a driver. If I see my profits going up on a monthly basis and know that if I buy a piece of equipment, I can save 20% of tax, then it’s an incentive.” 

7.5 Does it drive investment behaviour?  

Despite informed claimants interviewed declaring that AIA had made no impact on investment decisions, some did report impacts on their investment behaviour. AIA affected the value and the timing of investments.   

Regarding the value of investments, some informed claimants reported that, due to AIA freeing up and increasing cash flow, the business was able to make more frequent investments and also invest in more expensive or higher quality products.   

“We were in desperate need of the storage, but I suspect what we might have done is had we learnt it was not going to be as tax efficient as it might have been we might have gone for a smaller one and compromised a bit.” Informed claimant, 10 to 49 employees, Education, Health and Social Work  

In terms of impacts to the timing of investments, a couple of informed claimants observed that, due to AIA allowing investments to be claimed in the same year of purchase, investments were able to be brought forward in order to maximise the tax relief available.   

“We would probably not have purchased at the same time if AIA wasn’t there. The advantage of getting tax relief made us do it earlier by maybe 6 months. We needed the screens but we could have waited.” Informed claimant, 50 to 249 employees, Finance and Insurance  

7.6 Other AIA impacts  

While AIA’s impact on investment decisions and behaviour formed the primary area of interest in the research, informed claimants were also asked what impacts claiming AIA itself had had for their business. This was particularly important in illuminating any wider benefits of AIA, where impacts to investment decisions or behaviour may not have been observed.   

Several businesses highlighted secondary impacts resulting from the increased cash flow gained by claiming AIA. For example, some mentioned being able to reinvest this cash in other areas of the business, less essential to operations.   

“… You have more money coming back because of the relief. You have WiFi on coaches these days, USB ports, so without the relief you wouldn’t have quite as much money in the kitty for all these extras that the public now demand.” Informed claimant, 50 to 249 employees, Transport and Storage  

The increased cash flow also reduced the need to borrow on proceeding investments, sustaining or improving upon the businesses’ sense of financial independence. One business felt that AIA had encouraged sensible investment behaviour. It was observed that as AIA’s usage hinged on the business making a sufficient profit, an element of risk was removed when making investments as it reduced the need to borrow money.  

It is also worth noting that occasionally increased dividends were noted as a benefit. Informed claimants generally stated that savings were either not great enough to affect dividends or were reinvested into the company.  

Beyond advantages stemming from increased cash flow, investments that AIA had been claimed against had assisted companies in modernising, increasing efficiency, and improving services and company image. One business observed that they were able to remain competitively priced in their market as they were able to reduce costs generally passed onto their customers.   

“[AIA] has enabled us to move forward and progress the business technologically. The new IT stuff has made the business more efficient and quicker. We can probably attract better staff and impress potential clients with up-to-date technology and we work more efficiently.” Informed claimant, 50 to 249 employees, Finance and Insurance  

7.7 Summary

 For informed claimants, AIA was not perceived to have influenced or driven the decision to invest at all (sometimes the decision was even made retrospectively). Investments were driven by commercial necessity for particular assets.  

For some however, the availability of AIA influenced their investment behaviour. By freeing up cash flow, it allowed businesses to invest more frequently, or invest in higher value products. Furthermore, for some businesses, being able to claim in full, in the year of investment, allowed investments to be brought forward.  

Secondary impacts of the increased cash flow gained by claiming AIA included being able to reinvest in other areas of the business or reducing the level of borrowing required to fund investments

8. Future interest in using AIA  

Following discussions around the impacts of AIA, the research investigated both claimants’ and non-claimants’ opinions on the current limit of £200,000. In addition, this section looks at whether future interest could be affected by anticipated changes to the limit or increased awareness of its coverage.  

8.1 Opinions on the current limit  

Interviewed claimants generally found the limit to be sufficient, and in most cases this was due to their levels of investment falling substantially under £200,000. However, it is worth noting that medium-sized businesses, likely to have higher levels of investment, were under-represented in this research.  

Some claimants, whose level of investment fell closer to or over the limit, still felt that the current limit was sufficient. This opinion was generally down to the businesses’ own spending circumstances; for some, investment was expected to decrease or cease altogether in the near future. One claimant mentioned that the current limit was suitable for their business, in that the profitability capital investment levels allowed them to maximise the relief available.  

Unsurprisingly, some claimants with higher levels of investment felt the limit should be higher. Some suggested £500,000 as the appropriate limit, with one business aware that this had been the limit previously and expressing disappointment that it had been reduced. Another noted that, as their spending was far above the current limit, £500,000 would incentivise more investment.  

“For a small business like a builder, you can buy a small transit van for £10,000 to £12,000 so that allowance goes a long way, but when you are buying coaches for £200,000 or more, it doesn’t go very far… For our business, it is really not enough” Informed claimant, Medium-sized business, Transport and Storage   

After detailing how AIA worked, including its current limit, non-informed claimants and non-claimants were asked whether the current limit was sufficient for their business. On the whole, their views mirrored those expressed by informed claimants. Those with lower levels of investment generally found the limit to be sufficient. Whereas, those with higher levels of investment stated that they would prefer a higher limit.  

“We are a business of £12 million going on to £15 million and we can quite easily make [investment] decisions of £200,000, £300,000, £400,000 in a business this size then I would have thought bigger businesses are going say £200,000 isn’t enough. I came out of a business spending £1 million a year.  It would be nice if it was bigger.” Non-informed claimant, 10 to 49 employees, Manufacturing  

8.2 Future interest in using AIA  

Considering how AIA might affect future investments, claimants generally did not expect their investment behaviour to change. For some, investment behaviour was unlikely to change as a result of AIA, due to having sufficient awareness of AIA’s coverage and limit or because capital allowances, including AIA, had no influence on their decision to invest.  

However, through engagement with the research, some claimants, who previously had only partial awareness of the AIA’s limit or coverage, showed increased enthusiasm for claiming AIA again in the future. Furthermore, all non-informed claimants and non-claimants, some with no previous awareness of AIA, expressed future interest in considering and claiming it.  

“Amazing! That is half our turnover! It is a great amount, bigger businesses could utilise that, I’m amazed it is so much. £5,000 to £6,000 is the most we have ever claimed. I will be thinking more about what I can invest, that is eye-opening.” Informed claimant, 10 to 49 employees, Education, Health and Social Work  

Several respondents speculated that future interest in using AIA would be affected by any anticipated changes to the limit. If anticipating an increase to the limit, investments would likely be postponed until a later date in order to maximise tax relief in the future. One respondent, in particular, felt that this would encourage the implementation of a more structured investment plan, moving away from spending on an ad-hoc basis.   

In contrast to an anticipated increase, one informed claimant stated that if a decrease to the limit was expected that would cause them to reassess their investment plans and look into what other capital allowances they could claim.  

The same claimant expressed frustration where in the past, in anticipation of a decrease to the limit, they had brought forward investments, only to find that the acceleration of the purchase was unnecessary as the limit had not changed.  

“Sometimes it’ll be a last-minute thing, but quite often, obviously, we do know, it’s very nice to know that that is available for, certainly a year, if not eighteen months in advance.  It hasn’t changed for a few years, but there was a time, maybe in between governments or around a change in government, that it wasn’t announced that it [AIA] was going to keep going until right at the last minute. That’s annoying.  That would stop you planning a purchase, if you knew it was going to.” Informed claimant, 10 to 49 employees, Manufacturing  

8.3 Summary  

Businesses generally interviewed found the annual AIA limit of £200,000 to be sufficient for their needs. However, some businesses with higher levels of investment suggested £500,000 as a more appropriate limit.  

While most informed claimants did not expect their investment behaviour to change, some claimants with less awareness of the AIA’s limit and coverage showed increased enthusiasm for claiming again in the future. Non-claimants and non-informed claimants were also interested in using AIA in the future.  

9. Appendices  

9.1 Appendix A: AIA annual limit changes  

Sole traders	Limited Companies	AIA annual limit
From 1 January 2019	From 1 January 2019	£1million
1 January 2016 to 31 December 2018	1 January 2016 to 31 December 2018	£200,000
6 April 2014 to 31 December 2015	1 April 2014 to 31 December 2015	£500,000
1 January 2013 to 5 April 2014	1 January 2013 to 31 March 2014	£250,000
6 April 2012 to 31 December 2012	1 April 2012 to 31 December 2012	£25,000
6 April 2010 to 5 April 2012	1 April 2010 to 31 March 2012	£100,000
6 April 2008 to 5 April 2010	1 April 2008 to 31 March 2010	£50,000

9.2 Further Information 

IFF Research illuminates the world for organisations businesses and individuals helping them to make better-informed decisions.  

9.3 Our Values:  

Being human first:  

Whether employer or employee, client or collaborator, we are all humans first and foremost. Recognising this essential humanity is central to how we conduct our business, and how we lead our lives. We respect and accommodate each individual’s way of thinking, working and communicating, mindful of the fact that each has their own story and means of telling it.  

Impartiality and independence:  

IFF is a research led organisation which believes in letting the evidence do the talking. We don’t undertake projects with a preconception of what “the answer” is, and we don’t hide from the truths that research reveals. We are independent, in the research we conduct, of political flavour or dogma. We are open-minded, imaginative and intellectually rigorous.  

Making a difference:  

At IFF, we want to make a difference to the clients we work with, and we work with clients who share our ambition for positive change. We expect all IFF staff to take personal responsibility for everything they do at work, which should always be the best they can deliver. 

1. More information on the rates and pools used in WDA calculations   ↩

2. At the Budget 2018, The Chancellor announced the government will be introducing a new Structures and Buildings Allowance (SBA) for new non-residential structures and buildings, although this relief was not available at the time this research was conducted  ↩

3. At the Budget 2018, the Chancellor announced that the annual AIA limit will be increased to £1million from January 2019   ↩

4. Two businesses originally recruited for the research as HMRC records showed them as claimants, explained at the point of interview that they did not believe they had recently claimed AIA, and were therefore asked questions from the non-claimant topic guide. These businesses are referred to as non-informed claimants throughout this report.  ↩

5. The limit was subsequently increased to £1 million. All findings in this report relate to the £200,000 annual limit.   ↩

6. Definitions of the allowances mentioned are available in the glossary.   ↩

7. AIA annual limit changes are shown in Appendix A   ↩

8. Annual Investment Allowance    ↩