March 22, 2011 | Author

Author Julie Hanson

Another brick in the coalition's spending cuts agenda

Thanks to Arthur Kemp, HMO Tax for these predictions on the budget tomorrow.

As a result of HM Treasury looking into simplifying the current tax regime for small businesses, which of course has a knock on effect for the property owner, HMRC are looking to abolish the following tax relief’s pertinent to Capital Allowances. These are highlighted below:-

Business premises renovation allowance - This relief gives 100% capital allowances for expenditure incurred in converting or renovating unused business premises in certain areas and subject to certain conditions being met. HM Treasury find it questionable whether the relief acts as an incentive and it has a negligible impact in terms of savings.

Flat conversion allowances – This relief gives 100% capital allowances for expenditure incurred in converting empty or underused space over shops and commercial premises for residential use, subject to certain
conditions being met. HM Treasury find it questionable whether the relief acts as an incentive, it is complex and it has a negligible impact in terms of savings.

Land remediation relief -Where a company acquires contaminated or derelict land from a third party who was responsible for the contamination, there is enhanced relief for the costs incurred in cleaning up
the land. HM Treasury indicates that the relief is not considered to influence behaviour and is not a cost effective method of achieving the policy rationale.

Capital allowances – safety at sports grounds – Capital allowances are available for expenditure on safety precautions at certain sports grounds. As stadiums are mostly considered to be up to the required standards, HM Treasury find the policy rationale is no longer valid, and the relief is unlikely to be claimed in the future.
HM treasury have also considered the much ailed point that Capital Allowances should be replaced by a simpler form of tax deductible depreciation.
It is considered here:-

Capital allowances vs. depreciation

An issue that was regularly raised with HM treasury as a source of complexity is the calculation of capital allowances. The argument put forward is that allowing depreciation to be tax deductible for small businesses would be a simplification.
The problem is that the smaller business that this idea has in mind does not routinely prepare accounts of the sort that would show depreciation properly, thus there is rarely a balance sheet.

However, it was also noted in a number of HM treasury meetings that capital allowances do not pose a significant problem, and businesses would be unlikely to accept this change if it resulted in a greater tax liability. In any event, the annual investment allowance (“AIA”) has meant that the smallest businesses can claim a 100% deduction for plant purchases. However, the reduction in the AIA to £25,000 from April 2012 brings this issue back into focus: HM treasury were cited many examples of small businesses whose occasional purchase of a single item of plant such as a tractor or a lorry would exceed the £25,000 limit.

The actual calculation of capital allowances was suggested by some as causing difficulties in practice. Given the AIA, and tax software, we do not see this as a significant issue, though HM treasury do acknowledge that the regular changes in capital allowance rates in recent years has caused some problems.

HM treasury would also note an unfairness stemming from the way the capital allowance rates have changed. The rates have changed for both incorporated and unincorporated businesses; companies have had compensation through some reductions in corporation tax rates but there has been no such compensation for the (much larger) population of unincorporated businesses. HM treasury appreciate that such matters are policy issues, rather than simplification matters within the OTS’s strict remit, but HM treasury have to record them given the way they have been brought to our attention.
HM treasury therefore consider that the only policy options are as follows:-

HM treasury do not think that a blanket move to tax-deductible depreciation should be taken forward. However, there is scope to improve the position and help businesses with certainty. These include: As stated in the OTS’s review of tax reliefs report, fix on a level of AIA and keep to it for many years. The changes in limits are a real source of problems for smaller businesses;

Consider allowing a small business to split a purchase that exceeds £25,000 over two years if that enables it to utilise otherwise lost AIA; and Develop a process to allow a small business that acquires an interest in a building to identify quickly and agree the plant component of the building.
What does this mean for the discerning property owner?
In the short term, it means that plant & Machinery allowances are not changed. The ‘extra’ more valuable tax relief s are to be scrapped, potentially, and that confirmation of the AIA reducing has been achieved, although a more uniform level should be applied.

Confirmation of how the changes to FHL treatment will be clarified tomorrow.
To speak about these changes or anything else, please call Arthur Kemp
0845 467 2765