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Anomaly could spell capital allowance clawback

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25th Jan 2005
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Businesses investing in equipment that qualifies for energy-saving capital allowances may face an unexpected tax bill if their investments cease to qualify for the allowances at a later date, Grant Thornton has warned.

Tax partner Claire Hartnell told AccountingWEB that she had made it a "personal mission" to persuade the Revenue to acknowledge and remove the anomaly.

Hartnell said: "It seems unfair that investment decisions taken today with the capital allowances in mind can land businesses with an unexpected tax bill tomorrow. It is an example of giving with one hand and taking away with the other!"

Enhanced Capital Allowances (ECAs) enable businesses to claim a deduction for all of their capital spending on qualifying plant and machinery, allowing them to write off their investment costs against taxable profits of the same period.

Under current rules, Grant Thornton explained, there are two qualifying types of expenditure:

  • energy-saving plant and machinery, and
  • water conservation plant and machinery

Hartnell pointed out that as technology is continually developing, the lists of qualifying plant and machinery also evolve.

"This has the unfortunate consequence that what once qualified and allowed a business to claim 100% capital allowances can cease to qualify, meaning the business is then liable for the allowances previously claimed."

She added that the legislation has a "major effect" on property developers who "frequently look to take advantage of such allowances when building new sites with the latest environmentally-friendly plant and machinery, which tends to be more expensive than the standard environmentally-friendly equivalent".

Examples of energy-efficient fixtures and fittings can include air-conditioning, lighting and pipe installation.

Hartnell concluded: "What is astonishing is that an incentive to save energy is being undermined in this way. The fact that the impact of technological advancement is not taken into account in this legislation leaves such capital allowance incentives fundamentally compromised."

Hartnell told AccountingWEB she had contacted the Treasury on the matter, but had yet to receive a response.

She added: "This is clearly not what the Inland Revenue intends - but I'm trying to petition for them to at least issue a bulletin that would clarify what they mean."

More information on the ECA scheme can be found at: www.eca.gov.uk.

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