Business tax relief to hurt small businesses

Changes in the Finance Bill will mean that the increase in the Annual Investment Allowance (AIA) will have an adverse effect on small businesses who do not meet the spending requirements by 31 December 2020

Finance Bill 2018-19 includes a temporary, two-year increase to AIA, beginning on 1 January 2019. The amendments mean that a business with a year end of 31 March 2021 would have an AIA limit of £800,000 if it incurred all of its yearly qualifying expenditure in the nine months up to 31 December 2020. However, if all of its yearly expenditure occurred in the three months to 31 March 2021, AIA would be capped at £50,000. The proposed increase includes transitional provisions that will apply to every business which has an accounting year that straddles 1 January 2021.

The Association of Taxation Technicians (ATT) has expressed concerns that these criteria mean that the increase in AIA will reduce tax relief to some businesses, and recommends that small and medium-sized enterprises (SMEs) should be allowed to opt out and avoid adverse consequences, as larger businesses will be the main beneficiary of the temporary increase.

It also believes that the way that it will impact businesses whose year includes 1 January 2021 will ‘involve some confusing arithmetic and some surprising outcomes’ and suggests that many businesses will have to consider the tax implications of the timing of their capital expenditure.

Jon Stride, Co-Chair of ATT’s technical steering group, said: ‘We appreciate the benefit which the temporary increase in the AIA will provide for large businesses but we see it as very important to avoid the complications which previous temporary increases have created for very many small and medium sized businesses.

‘The problem arises for these businesses in the accounts year during which the temporary increase ends. Mistiming their capital expenditure in that year can result in much less AIA than expected. Our focus is to make the mechanics of the temporary change as simple as possible.

‘We cannot see why those businesses whose qualifying capital expenditure in each of the next two calendar years (2019 and 2020) will not exceed the £200,000 annual limit should suffer a disadvantage from a measure which is intended to benefit business. That outcome could be avoided by the inclusion of an opt-out provision which ensured that all businesses could benefit from at least £200,000 of AIA in the second straddling period, regardless of whether that expenditure was incurred in 2020 or 2021.’

Report by James Bunney


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