Business investment tax relief proposals ignore small businesses, worries ATT

The concerns are set out in ATT’s response to a government consultation¹ on potential reforms to the UK’s capital allowance regime announced in the 2022 Spring Statement. The suggested reforms include increasing the permanent level of the Annual Investment Allowance (AIA) – which allows most businesses to deduct the full amount of qualifying plant and machinery expenditure up to a set level to arrive at taxable profits - , ²increasing the rates of Writing Down Allowances (WDAs) which give tax relief for plant and machinery not covered by the AIA, introducing general First-Year Allowances (FYAs) for qualifying expenditure on plant and machinery, introducing an additional FYA and/or introducing permanent full expensing, which would allow all qualifying expenditure to be deducted in full as it arises.

Senga Prior, Chair of the ATT’s Technical Steering Group, said:

“We remind the Chancellor that capital allowances affect an extremely wide range of businesses, from the smallest unincorporated sole trader such as a plumber to the most complex multinational corporate group. He must avoid a one size fits all solution in the effort to support business investment or risk an expensive mistake that fails to foster a new culture of enterprise and growth in the UK.

“The reform options in his Spring Statement focus on the timing and level of relief for qualifying capital expenditure but they will have little or no impact on those smaller businesses which do not spend above the Annual Investment Allowance (AIA). A more pressing issue for smaller businesses is the complexity of the current capital allowance regime.

“Before he reports back on these proposals at the autumn 2022 Budget, we urge the Chancellor to look not only at how to incentivise greater capital investment by high-spending businesses but also at how to simplify the capital allowances rules for smaller businesses and make them more coherent. We also suggest setting an appropriate AIA limit and sticking to it, rather than making repeated, often last minute, changes which reduce certainty and can catch out smaller businesses."³

The ATT explains that for the smallest businesses, investment decisions are dictated by commercial needs, not capital allowance incentives. By contrast, larger businesses are more likely to plan expenditure further in advance and to have more sophisticated decision-making processes. For example, if a plumber needs new tools or a van, they are likely to need them in the short term, rather than plan for their acquisition months in advance. They may expect that some form of tax relief is available without a deep consideration of the technicalities. The availability of a specific capital allowance incentive is therefore unlikely to drive a decision as to whether to invest at that time or not as the business need is key. Where they may have an impact, says the ATT, is if there is a choice between different assets with one providing for a better capital allowances position than the other (for example a car vs a van) or in the timing of expenditure close to the end of the tax or accounting year, which may require the business to seek advice, incurring advisor costs.

Senga Prior said:

“All sizes of business would benefit from a capital allowances regime which is stable and not subject to frequent changes. This would remove complications for smaller businesses where the AIA threshold is reduced as well as facilitating easier investment decisions for larger businesses.”

In separate comments, the ATT recommends the Government consider whether additional First-Year Allowances (FYA)⁴ could be converted into a payable tax credit for loss making companies (in a similar manner to the R&D regime). 

Senga Prior said:

“This would provide valuable support for growing businesses looking to invest, as well as helping smaller businesses which may not be able to utilise their allowances other than in the form of a carried forward loss. But we note that this would come with an additional cost to the Exchequer and would have to be clearly defined to prevent tax avoidance.”

Notes for editors

 1. The Association of Taxation Technicians has responded to HM Treasury's Policy Paper on Potential Reforms to UK’s Capital Allowance Regime.  ATT’s response can be found here. 

2. Annual Investment Allowance (AIA)

The AIA allows most businesses to deduct the full amount of qualifying expenditure up to a set level to arrive at taxable profits. The AIA can be claimed on most plant and machinery expenditure but notably excludes expenditure on cars. The permanent level of the AIA is set at £200,000 per year, which has been temporarily increased to £1m per year between 1 January 2019 and 31 March 2023.

One option would be to increase the permanent level of the AIA from £200,000 to, for example, £500,000.

3. Frequent (and often last minute) changes to AIA thresholds reduce certainty and make investment planning and forecasting difficult for businesses. In addition, where a business has an accounting period which straddles a decrease in the AIA threshold, the transitional rules can result in a much lower overall AIA being available than would otherwise be expected. For example, when the threshold reverts to its permanent level on 31 March 2023, a business incurring qualifying expenditure on or after 1 April 2023 but in an accounting year which straddles 31 March 2023, such as 30 April 2023, could have an effective AIA limit of as little as £16,667 if all its capital expenditure was in the final month of its accounting year.



4. First-Year Allowances (FYAs)

FYAs allow businesses to deduct a percentage of qualifying expenditure in the year the expenditure is incurred. FYAs are uncapped and do not count towards the AIA limit. Most FYAs provide 100 per cent capital allowances for qualifying expenditure on specific new plant and machinery or for specific regions. For example, there is a 100 per cent FYA for zero-emission goods vehicles and a 100 per cent FYA for plant and machinery primarily for use in a Freeport tax site. However, FYAs have also been used to provide general incentives to invest in plant and machinery. For example, the 130 per cent super-deduction and the 50 per cent special rate allowance are both FYAs. One option the Government is considering is general FYAs for qualifying expenditure on plant and machinery, for example a 40 per cent FYA for expenditure on main rate and a 13 per cent FYA for expenditure on special rate plant and machinery.