The Chancellor has increased the annual investment allowance (AIA) from £200,000 to £1m for the next two years.
Announced in yesterday’s Budget, the increase will affect all qualifying investment in plant and machinery made on or after 1 January 2019 until 31 December 2020.
Since its introduction in April 2008 the AIA ceiling has been set at £50,000, £100,000, £25,000, £250,000 and £500,000 before settling in January 2016 at the current £200,000 level.
The move is designed to stimulate business investment, but tax experts and bodies have raised concerns that the increase may bring only complexity for businesses whose expenditure is below the annual ceiling.
Brexit investment boost
According to HMRC statistics, some 30,000 businesses (around 3% of the UK total) have annual expenditure on qualifying assets that exceeds the current annual expenditure limit of £200,000.
Moore Stephens Partner Mike Cooper welcomed the move as a “significant and welcome increase,” despite the measure only lasting for a “short amount of time”.
“It seems that the short time frame is to encourage businesses to keep investing ahead of Brexit,” continued Cooper. “There are already signs that Brexit has led to businesses putting off their investment decisions. If businesses stop investing it will drag down economic growth.”
The number of capital allowance claims has fallen over the past year, which some commentators have speculated was the stimulus for the increase.
John Harcourt, head of Kajima Property, added that the Chancellor’s decision was a welcome one, particularly at a time when the UK’s capital allowance regime has been marked the least competitive of all G7 countries.
‘Saddled with complications’
However, the allowance rise has raised fears that the 97% of businesses that claim the allowances but whose expenditure is below the annual ceiling may be saddled with the complications introduced by the temporary increase without being able to benefit from it.
Michael Steed, co-chair of ATT’s technical steering group, said the added administrative burden of negotiating the transitional rules required to cope with the fluctuating levels have produced unintended consequences and called for stability in the allowance to allow businesses to plan for capital expenditure.
Given that such a relatively small number of businesses are likely to benefit from the change, Steed believes the complicating transitional provisions should only apply to those businesses that are able to benefit from the temporary increase. “The simplest way for this to be achieved would be to permit all other business to opt out of the increase,” said Steed, “thereby enabling them to ignore the transitional rules.”
“In some cases, businesses whose annual expenditure in their accounting year was apparently within the annual limit have ended up being denied the full benefit of the allowance because of the timing of their expenditure within their accounting year."
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