Guide · worked example

Buy a £3,000 espresso machine, deduct £3,000 this year: how AIA actually works

One of the most common confusions in a company tax return: the depreciation in your accounts is NOT tax deductible. Instead, HMRC gives you something usually better, the Annual Investment Allowance, which deducts the whole cost of most equipment in the year you bought it.

The two books being kept

Your accounts spread the cost of equipment over its life (depreciation). The tax computation ignores that entirely and applies its own rules (capital allowances). The CT600 journey between them is: start with the accounts profit, add depreciation back, deduct the allowance.

Result: the company pays tax on £7,000, not £9,250, in the year it bought the machine. At the 19% small profits rate that is £427.50 less tax now. Nothing is lost later either; it is timing, and cash earlier is worth more.

What happens in the following years

The accounts keep charging £750 of depreciation for three more years. Each year the tax computation adds it back with nothing to deduct, because the whole cost was already claimed. Taxable profit is £750 higher than accounts profit in those years. Over the four years the two books agree exactly; AIA just front-loads the relief.

What qualifies, and the catches

• Most business equipment qualifies: computers, printers, tools, machinery, office furniture, vans.
• Cars do not qualify for AIA. They get slower writing-down allowances instead (new fully electric cars can get a 100% first-year allowance).
• The limit is £1,000,000 a year, which a micro company will never touch.
• If the company is not VAT registered, the allowance is the price you actually paid including VAT.
• Sell the asset later and some relief claws back as a balancing charge, since you deducted the full cost up front.
• Claiming the AIA in a loss year makes the loss bigger, which combines with loss carry-back if last year was profitable.

Illustration only, simplified for clarity. Real returns can differ. This page explains the mechanism; it is not tax or accountancy advice, and the figures on any return remain the company's responsibility.