Annual investment allowances
These are a very useful tool that simplify the tax code for most businesses and encourage investment in capital assets.
Changes to the threshold introduce great complexity and produce wild and unfair distortions in the available tax relief over the transitional period. We therefore urge the introduction of a long-term threshold and a commitment to keep it at that level for the foreseeable future.
Our preference would be to make permanent the current temporary level of £1 million. If that is too expensive, a level of £500,000 (rather than £200,000) would still benefit many of our clients.
Expensing
With a more generous permanent level of AIAs, capital allowances provide a valuable form of tax relief. Whilst expensing is superficially attractive, there is a danger of throwing out much that is good about the capital allowances regime.
Capital allowances allow a distinction to be drawn between different types of assets (e.g. plant or machinery, and buildings), and can be used to motivate businesses in positive ways (e.g. re lower emission cars). The fixtures rules are a sophisticated and largely successful regime to work around the problems of property ownership, and it is difficult to see how they would work with expensing.
Writing-down allowances
The higher the level of AIAs, the less significant the rates of WDAs.
However, WDAs remain of significance in certain circumstances, including three categories in particular: the largest businesses (as they incur higher levels of qualifying expenditure); large construction projects (as these may exceed the AIA limit each year); and cars (as AIAs are not given for these).
Increasing the rates of WDAs to 20% and 10% for main rate and special rate expenditure respectively would provide tax relief that is closer to real depreciation rates.
For cars, we appreciate the desire to encourage investment in zero or lower emission cars, but the 6% rate for vehicles with emissions over 50g/km is penal and unfair, lagging hugely behind real depreciation rates. Many businesses need cars for wholly legitimate purposes and electric (or ultra-low emission) cars are not yet an option for all. Employees driving company cars already face high tax charges, so there is no “loophole” here and businesses deserve a more realistic rate of tax relief.
Structures and buildings
This relatively new regime is welcome but remains ungenerous.
A higher annual rate of 4% (over 25 years) or 5% (over 20) would be helpful (and would simplify).
Encouraging green investment
The system of enhanced capital allowances (ECAs) for certain “green” expenditure was complex in its detail and the abolition therefore brought a simplification to the capital allowances regime.
However, the current list of assets qualifying for first-year allowances is very narrow, offering little motivation to buy greener assets.
We recommend that FYAs should be offered, ideally at 100% but alternatively at 50%, for a defined list of assets, broadly based on those that used to qualify for ECAs but distilled into a simple list. So, for example, taps that run only when needed would qualify, without the need to identify the manufacturer or precise model. The same would apply to all lighting systems that require lower energy levels.
Pooling and fixed value requirements
We understand the thinking behind these, but the pendulum has swung from being too lax to too restrictive.
We are aware of a situation where an inter-group transfer of assets was made, for wholly legitimate business reasons, but where seven-figure capital allowances were lost because of ignorance of these rules. Another common situation is where the solicitors acting for a vendor have not understood the capital allowances implications and where the buyer has not secured the necessary commitments from the vendor to pool qualifying expenditure.
We urge the introduction of a let-out clause, where the onus is very much on the taxpayer to show that allowances have not been claimed but where a claim is then allowed if this is achieved.
Written by Ray Chidell MA (Cantab), CTA (Fellow)Technical Director at Six Forward Ltd
