The Treasury has published draft legislation for a proposed Annual Investment Allowance (AIA) which will provide an annual 100 per cent allowance for the first £50,000 of investment in plant and machinery (other than cars) to all businesses regardless of size.

Under the proposals, as with the present 40 or 50 per cent first-year allowances (FYAs) for small or medium-sized enterprises (SMEs), the AIA will not be available for expenditure on business cars, but expenditure on most other plant and machinery, including integral features and long life assets, will be eligible.

According to the Treasury documentation:

• Businesses will be free to allocate their AIA to qualifying expenditure in any way they wish; there will be no rules to restrict their freedom of choice. They will therefore be able to set their allowance against expenditure qualifying for a lower rate of allowances (such as expenditure on ‘long-life assets’ or ‘integral features’) before using any balance against their general plant and machinery expenditure.
• All qualifying expenditure up to £50,000 in total will receive a 100 per cent first- year allowance. Any additional expenditure over this level will be dealt with in the normal capital allowances regime, entering either the 10 per cent or 20 per cent pool, where it will attract writing-down allowances at the appropriate rate.
• The AIA does not replace the existing 100 per cent enhanced capital allowances schemes for environmentally beneficial plant and machinery; these will continue to be available. Other plant and machinery allowances schemes offering 100 per cent allowances will also continue to be available. Similarly, expenditure that qualifies for 100 per cent capital allowances under separate capital allowances codes (for example, Business Premises Renovation Allowances, Flat Conversion Allowances or Research & Development Allowances) will be unaffected by the introduction of the AIA.

It will replace the existing 40 or 50 per cent first-year allowances for investments in plant or machinery by (SMEs). The full documentation is available at http://www.hmrc.gov.uk/legislation/pu451.pdf.