Capital allowances: 'Two cheers' for doubled AIA
One of the centrepieces of a Budget speech designed to support business investment was George Osborne’s announcement that the annual investment allowance would be doubled from the current £250,000 to £500,000 until the end of 2015.
In spite of protests about the complexity of continually tinkering with the AIA, the Chancellor clearly perceived last year’s temporary increase from £25,000 to £250,000 as a crowd-pleaser. Maintaining the same rate and extending it for longer would have been simpler for all concerned, but he opted instead to go for another temporary increase to £500,000 until 31 December 2015.
Having lobbied before the Budget for an even bigger increase to £1m, BDO tax partner Richard Rose commented that mid-size businesses wanting to expand would welcome the chance to get up to £100,000 tax back on investment in plant and machinery.
According to the government, 99.8% of businesses will now receive 100% up-front relief on investments in plant and machinery - but not cars. Accelerating the relief up to £500,000 will encourage small and medium-sized businesses to increase or bring forward their capital investment in plant and machinery. Three-quarters of recipients are located outside London and the South East and “it will particularly help the agriculture and manufacturing sectors,” HMRC said.
Responding to the announcement on AccountingWEB’s live Budget blog, Mike Roberts commented, “Don't know about anyone else but we have no small business clients who would spend that amount in one year.”
Perhaps conscious of the friction caused by the changing rates, HMRC’s tax information and impact note includes an explanation of how the transitional rules will operate for businesses with reporting periods that span the periods where the allowance differs. There are also more detailed transitional rules about entitlement to AIA among group companies, or related businesses under common control.
Ray Chidell, the Claritax author and publisher who offered a free guide to the transitional arrangements when the AIA was increased from £25,000 in 2013, commented: “The AIA has sprung surprises from the outset, and today's Budget announcement was no exception.”
Offering “two cheers” for the announcement, he continued: “The increased figure will be welcome for businesses making substantial investments in plant or machinery, including those acquiring commercial property with fixtures. Also for groups of companies that have to share a single amount.
But there are two downsides:
- We now have yet more transitional rules to cope with, including some sooner than we had expected. These will not, however, be as bad as those applying when the increase came in.
- It is still difficult to see any justification for the yo-yo rates of AIA. If £500,000 is right for the next 20 months, how can £25,000 be right thereafter? (This is, after all, only a cash flow measure, not a permanent cost to the Treasury.) I would welcome a measure that implements a permanent figure of, say, £100,000 from 1 January 2016, with a commitment to keep it there for at least five years. Lower tax rates are always welcome, but so is stability and predictability in the tax system.
The Budget report and HMRC’s tax information note give a few hints about the benefits that will be delivered by the increase. The OBR’s forecasts, for example, predict that the AIA increase will bring forward around £1bn of business investment from 2016 and 2017 into 2014 and 2015.
The impact assessment shows that the cost to the Exchequer will be nearly £2bn through 2014-16; but most of that will be clawed back in the three subsequent years, after the AIA is due to be reduced.
On his Claritax Books blog page, Chidell published an overview of other capital allowance changes. Highlights include:
Enterprise zones - First-year allowances for Enterprise Zones were due to expire from 31 March 2017 but have been extended for a further three years. The term “enhanced capital allowances” usually refers to the first-year allowances given for certain expenditure on energy-saving or water-saving technology (see below). In this context, however, HMRC have extended the term to cover a broader range of first-year allowances. For more detail, see the HMRC policy paper Enterprise Zones: enhanced capital allowances.
Enhanced allowances for “green” expenditure - Two new energy technologies will be added to the list of equipment qualifying for “enhanced” first capital allowances from the summer: active chilled beams and desiccant air dryers with energy saving controls. The qualifying criteria for water scheme technologies and other green technology are being reviewed and will change from the summer. For more, see the HMRC Tax information and impact note 9008.
Business premises renovation allowances - will see some important changes, including a reduction from seven to five years in the period in which balancing adjustments must be made. Qualifying expenditure will be restricted to “the actual costs of construction and building work, and for certain specified activities such as architectural and surveying services”. Details here.
Mineral extraction allowances - changes to the treatment of successful planning permission costs. Details here.
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