Business received an unexpected incentive to invest when George Osborne announced a temporary rise in the annual investment allowance (AIA) during his Autumn Statement last year.
At the time of the announcement, the ten-fold increase in the AIA limit to £250,000 was lauded as being good news for businesses that were thinking of investing in capital equipment but could do with a nudge. A number of companies were considering taking advantage of this government largesse; one in five production sector respondents said that the temporary increase might encourage them to invest in capital items, according to ICAEW research conducted ahead of the 2013 Budget.
There tend to be many incentive schemes, all of them very complex. Government should look to simplify
Fast forward to today and the ability to claim increased capital allowances does seem to have swayed the balance for some companies. “In a number of cases, companies that either wouldn’t have invested in new equipment or that would have invested less have decided to go ahead because of the increase in allowance,” says Ian Wood, head of marketing at Lombard.
Some of Stanley Tax Associates’ clients who were in the process of planning expenditure when the increase was announced delayed their purchases until the start of 2013 to take advantage of the two-year window. “We’ll probably see the reverse happening at the end of next year,” says managing director Andrew Stanley. “But that’s what the chancellor wants – people spending the money now so that the whole supply chain of capital items will be that much healthier.”
While the higher AIA is appreciated, Richard Churchill, partner at Shelley Stock Hutter, says finance is business’s first concern. “Companies can only make large-scale capital investments if they have the money to do it,” he says.
“If they already have plans to expand and they have sufficient cash or credit resources, then they are bringing their plans forward to obtain the relief as soon as possible.”
Government hopes that the higher limit would significantly boost investment may, however, have been misplaced. The latest findings from the Q3 2013 ICAEW/Grant Thornton UK Business Confidence Monitor found that while business confidence is continuing to rise, capital investment growth is still very weak.
While access to finance is the main problem inhibiting AIA uptake, another issue is poor awareness of the increase. “Because it was announced in the Autumn Statement rather than the Budget it may not have received the attention it deserved,” says Charles Ellis, head of capital allowances at RIFT Group. Wood is concerned that if too few claims are made, the annual AIA limit may end up reverting to its previous level of £25,000.
“George Osborne used the term ‘use it or lose it’ about the AIA. Businesses need to understand how it can help them so they can take it into account when they plan for investment. It’s not just about providing a financial incentive for business investment in capital equipment; it can help suppliers and manufacturers by increasing their order books. We hope that if businesses appreciate the benefit from the AIA and claim it, then Osborne may look to extend the increase beyond the current deadline.”
AIA was originally introduced in 2008 as a 100% allowance on most kinds of business assets other than cars, land or buildings (although it does apply to plant within buildings such as electrical and plumbing systems), or energy-saving and water-efficient technology assets (which qualify for the enhanced capital allowances scheme).
Although AIA only applies to a company’s new investment, it can be claimed on new or used plant and machinery. As is usual with capital allowances, assets bought for cash or under hire purchase qualify, while leases (with the exception of certain long-funding leases) do not.
One of the restrictions on AIAs is that the £250,000 limit applies to a group rather than a company. Irrespective of how many businesses are run under one company or how many companies are in a group or are under common control, the company or group can only claim a maximum of £250,000 each year (although there is some flexibility in planning how best to spread the limit).
A number of our submissions have urged the government to end this culture of constant change in tax
Another point companies and their advisors need to be aware of is that the maximum AIA of £250,000 is only available for accounting periods that fall wholly within the temporary increase period of 1 January 2013 to 31 December 2014.
So, for example, a company with a year ending on 31 March 2015 will be entitled to a maximum of 9/12 of the £250,000 current AIA limit plus 3/12 of whatever the maximum limit becomes after the end of 2014. In practical terms, this means that companies without a December year end will need to carefully time any investment in 2014 to get maximum benefit.
The first annual limit on the AIA was £50,000. This was doubled in 2010 before dropping back to £25,000 in April 2012. The ten-fold increase from 1 January 2013 surprised everyone, ICAEW included.
“You could have knocked me down with a feather,” says head of enterprise Clive Lewis. “We had lobbied for the AIA to revert to £100,000 but didn’t expect this kind of rise.”
He has mixed feelings about the higher limit, as pleasure at the increase is tempered by dismay over the tinkering with the tax regime. “A number of our submissions to the chancellor have urged the government to end this culture of constant change in tax. We still make that plea.”
In fact the only certainty about the AIA limit right now is that it is temporary. “This makes it virtually impossible for businesses to plan,” Lewis points out. “It would be better if the tax regime were boring but predictable.”
Business needs a stable environment to plan growth, Stanley agrees. “A bit of consistency in policy would go a long way. It’s very nice having a two-year window and you can drive investment into that period, but it might not always be the most sensible move from a business perspective.”
Wood thinks that the government should do more to promote the higher limit. “Government doesn’t always make it easy for business to invest and it doesn’t shout sufficiently loud about schemes that are available. There tend to be many incentive schemes, all of them very complex.
“Government should certainly look to simplify them and make it easier for SMEs to take advantage of them.”
The changes in allowances on existing plant and machinery are a case in point: while the initial allowance has increased, writing-down allowances have fallen to 18% and 8%.
“It’s giving with one hand and taking with the other,” says Stanley. “I appreciate that we’re all living longer, but I don’t know that our capital items are.”
Churchill thinks there is a case for abolishing the AIA limit altogether. “This would send a strong message about the UK being open for business and could encourage a lot of overseas investment into the UK,” he says. “If a couple of overseas businesses spent, say, £25m on setting up factories, think of the impact on all the local suppliers and the tax revenue and employment that would be generated.
“The wealth creation would outweigh the initial tax break on that capital investment.”
There may be trouble ahead
There’s another storm brewing in the capital allowances field with new rules on fixtures and fittings coming into play next year. In any property transaction after 1 April 2014, the seller will need to have claimed capital allowances on fixtures and fittings in the property in order for the buyer to be able to claim these allowances once the sale has completed.
This has serious implications for the property market. “A property being sold with £100,000 tax relief will clearly be worth more than a property with zero tax relief,” Charles Ellis of RIFT Group says. “But the allowances have to be considered when the deal is struck. Otherwise they will be permanently lost.”