The Association of Taxation Technicians (ATT) is concerned that provisions in the Finance Bill (published today) will mean that the temporary increase in the Annual Investment Allowance (AIA) for a two-year period starting on 1 January 2019 will actually reduce the tax relief available to some businesses. The ATT recommends the inclusion of an opt-out clause to overcome that consequence.
The AIA enables businesses1 to claim tax relief on the whole of their qualifying capital expenditure in the year of expenditure. The ATT notes that the transitional provisions2 which will apply to every business which has an accounting year which straddles 1 January 20213 will involve some confusing arithmetic and some surprising outcomes.
The ATT is recommending an amendment to the Finance Bill which would avoid the adverse consequence for small and medium sized businesses without impacting the larger businesses which will be the main beneficiaries of the temporary increase in the AIA from £200,000 to £1 million.4
Jon Stride, Co-Chair of ATT’s Technical Steering Group, said:
“We appreciate the benefit which the temporary increase in the AIA will provide for large businesses but we see it as very important to avoid the complications which previous temporary increases have created for very many small and medium sized businesses. The problem arises for these businesses in the accounts year during which the temporary increase ends. Mistiming their capital expenditure in that year can result in much less AIA than expected. Our focus is to make the mechanics of the temporary change as simple as possible.
“As currently drafted, the Finance Bill provisions mean that a business with a year end of 31 March 20215 would have an effective AIA limit of £800,0006 if it incurred all its qualifying expenditure for that year in the nine months up to 31 December 2020. By contrast, if the whole of that expenditure was incurred instead in the three months up to 31 March 2021, the AIA would be restricted to just £50,000.7
“We cannot see why those businesses whose qualifying capital expenditure in each of the next two calendar years (2019 and 2020) will not exceed the £200,000 annual limit should suffer a disadvantage from a measure which is intended to benefit business. That outcome could be avoided by the inclusion of an opt-out provision8 which ensured that all businesses could benefit from at least £200,000 of AIA in the second straddling period, regardless of whether that expenditure was incurred in 2020 or 2021.
“Without the type of measure which we are suggesting, many businesses (other than those with a 31 December year-end) will have to consider the tax implications of the precise timing of their capital expenditure. What we are recommending should not impact Exchequer revenue; it simply removes an unnecessary timing complexity which will otherwise be a concern for business and impose an unwelcome additional policing responsibility on HMRC."
Notes for editors
1. The AIA is available to all trading businesses regardless of their structure so it applies equally for limited companies, LLPs, partnerships and sole traders.
2. The Finance Bill legislation regarding the temporary increase in the AIA is in Clause 31 and Schedule 12. The transitional provision concerning the amount of the AIA available in the part of a chargeable period which falls after 31 December 2020 is in paragraph 2(3) of Schedule 12.
3. The transitional legislation refers (in paragraph 2(1) of Schedule 12) to any accounts year of a business which includes, but does not end on, 31 December 2020 as “the second straddling period”.
4. In its report Accounting depreciation or capital allowances? Simplifying tax relief for tangible fixed assets published on 15 June 2018, the Office of Tax Simplification (OTS) noted (in section 5.22) that:
“About 30,000 businesses spend more on capital expenditure than the AIA Limit and about 1.2 million businesses spend less than the AIA limit.”
On page 5 of the same report, the OTS noted:
“Early in the review it became clear that the number of taxpayers whose capital expenditure exceeds the AIA limit of £200,000 is small, being only about 30,000.”
5. 31 March is a relatively common year end for businesses.
6. The £800,000 figure is the sum of nine months of the temporary £1,000,000 limit (£750,000) and three months of the normal £200,000 limit (£50,000).
7. The £50,000 figure represents three months of a £200,000 annual limit. For a business with a year end of 31 January 2021 or 28 February 2021, the effective limit for expenditure after 31 December 2020 would be even lower (£16,667 or £33,333 respectively in round terms). Any qualifying expenditure in excess of the restricted AIA limit is still eligible for the annual writing-down allowance but, at best, that is only at 18% on a reducing balance basis and it could be as low as 6%.
8. The adverse outcome could be avoided in one of two ways.
- The legislation could permit a business to opt out of the entitlement to the temporary £1 million level of AIA, thereby preserving entitlement to the normal and uncomplicated £200,000 annual limit.
- The alternative would be to permit any business that had spent less than the normal £200,000 limit on qualifying expenditure in the months before 1 January 2021 to claim AIA on qualifying expenditure in the remainder of the second straddling period to the extent that it did not exceed the difference between the £200,000 limit and what it had actually incurred in the months up to 31 December 2020.
As a simple example of how the second alternative measure would work, if a business with a year end of 31 March 2021 had incurred £45,000 of qualifying expenditure up to 31 December 2020, it would be entitled to AIA on up to a further £155,000 (being £200,000 minus £45,000) on expenditure incurred in the three months to 31 March 2021. Without the suggested measure, the AIA limit on such post 31 December 2020 expenditure would be £50,000 (see Note 6 above).
Each alternative would have the same result of eliminating the restriction of the AIA limit for the months after 31 December 2020.