Tax experts are warning that chopping and changing of capital allowances will lead to error, confusion and higher professional costs for small businesses.
The Association of Taxation Technicians (ATT) sets out its concerns in its response to HMRC on the draft Finance Bill provisions on the Annual Investment Allowance (AIA). This is the allowance that enables businesses to claim full tax relief on eligible capital expenditure.
Under the Government’s proposals the AIA limit is being increased for the two year period between 1 January 2013 and 31 December 2014 from £25,000 to a headline figure of £250,000. However, in reality, the actual limit on qualifying expenditure from 1 January 2013 can be less than £25,000 depending on the firm’s accounting year end and the level of its qualifying expenditure incurred before 1 January 2013 1. As the AIA limit was only reduced from £100,000 to £25,000 from 1 April 2012, the combined effect of that reduction and the proposed temporary increase is that within a period of just 39 months, there can be as many as seven occasions when the precise dating of expenditure determines how much tax relief the business will get each year on its capital expenditure.
ATT President Yvette Nunn explained:
“These proposals are well-intentioned but will be very problematic for small firms in particular. The arithmetical complexities involved will lead to error and confusion and result in increased professional costs for businesses and an unnecessary diversion of HMRC resources into policing the cliff edges at the critical dates.”
“The majority of SME businesses spend far less than £250,000 every year. For them, it would be far simpler for the old £100,000 annual limit to run through to 31 December 2014. In that way, there would be only one cliff edge. So we are urging the Government to allow businesses to elect out of the confusing varying limits and into a flat limit of £100,000 a year from April 2012 for the whole affected period. We think that this would work well for businesses, HMRC and the economy.”
Yvette Nunn added:
“Small firms and entrepreneurs are the life blood of the economy. Encouraging these businesses is vital for Great Britain. If it looks too complicated to start and manage a business then we will deter the innovation and enterprise we need to get our economy motoring again.”
Notes to Editors
- The complexity arises because of the way in which the Annual Investment Allowance (AIA) is calculated and the fact that different businesses will have different accounting year ends.
Depending upon the accounts year end of a business and its level of capital expenditure up to 31 December 2012, the effective AIA limit for expenditure after that date in its accounts year that includes 1 January 2013 can be anything between £18,750 and the full £250,000.
This is set out in greater detail in the ATT’s submission: http://tinyurl.com/attaia