Finance Bill

Written evidence submitted by the Association of Taxation Technicians (ATT) (FB01)

Transitional Operation of the Annual Investment Allowance: Summary

Clause 8 of the Finance Bill increases the Annual Investment Allowance (AIA) limit to £200,000.

The introduction of the new £200,000 limit is subject to the transitional provisions which are contained in paragraph 4 of Schedule 2 to Finance Act 2014.

The replacement of the temporarily increased maximum AIA (currently £500,000) by the increased permanent maximum allowance of £200,000 from 1 January 2016 will have surprising consequences for certain businesses.

The businesses which are likely to be most adversely impacted by the existing transitional provisions are those with features such as:

A business year end falling early in calendar year 2016;

A newly started or expanding trade;

Seasonal cash-flow;

Unpredictable profitability;

A cautious approach to capital expenditure.

The accompanying written evidence proposes a legislative amendment that would:

Reduce the adverse impact of the transitional provisions;

Simplify the calculation of the amount of AIA available to businesses;

Reduce the burden on HMRC of checking calculations.

The written evidence is supported by three accompanying tables (included at the end of the Word document.

1. Executive summary

1.1. The replacement of the temporarily increased maximum Annual Investment Allowance (AIA) (currently £500,000) by the increased permanent maximum allowance of £200,000 from 1 January 2016 will have surprising consequences for certain businesses.

1.2. The businesses which are likely to be most adversely impacted by the existing transitional provisions are those with features such as:

1.2.1. A business year end falling early in calendar year 2016;

1.2.2. A newly started or expanding trade;

1.2.3. Seasonal cash-flow;

1.2.4. Unpredictable profitability;

1.2.5. A cautious approach to capital expenditure.

1.3. This submission proposes a legislative amendment that would:

1.3.1. Reduce the adverse impact of the transitional provisions;

1.3.2. Simplify the calculation of the amount of AIA available to businesses;

1.3.3. Reduce the burden on HMRC of checking calculations.

2. Background and introduction

2.1. Clause 8 of the Finance Bill increases the AIA limit to £200,000.

2.2. The AIA enables businesses (whether structured as limited companies, partnerships or sole proprietorships) to claim full tax relief on the amount of their qualifying capital expenditure up to the statutory limit for the year in which it is incurred. This enables that expenditure to be written off for tax purposes in one year rather than gradually over a period of time. Typically, the Writing Down Allowance which applies to expenditure that exceeds the AIA limit means that it takes twelve years to get tax relief on 90% of such expenditure.

2.3. In the Summer Budget, the Chancellor of the Exchequer announced:

"Mr Deputy Speaker, if Britain wants to produce more, it needs to invest more.

Many small and medium sized businesses have benefitted from our enhanced Annual Investment Allowance. This Allowance was set at £100,000 when we came to office – it is higher now, but without action it will fall to just £25,000 at the end of the year.

That would especially hit middle-sized companies in areas like manufacturing and agriculture that we want to do more to build up in Britain.

So I can confirm that the Annual Investment Allowance will not fall to £25,000 but be set at £200,000; this year and every year.

A major, permanent boost to the incentives for long-term investment by small and medium sized firms in Britain."

2.4. Without the permanent increase in the AIA limit to £200,000, the limit would have reduced from the current temporary limit of £500,000 to just £25,000 from 1 January 2016. The increase to £200,000 will remove the adverse impact of the transitional provisions for businesses with very low levels of qualifying capital expenditure. However, for businesses which have greater but still modest levels of capital expenditure, the transitional provisions will produce very unusual outcomes. For example, a business with a year end of 31 January 2016 that incurs all its qualifying capital expenditure for that year on or after 1 January 2016 will have an effective AIA limit for the whole year of only £16,667 (being one twelfth of £200,000). If it had incurred the identical expenditure on or before 31 December 2015, the limit would have been over twenty eight times higher at £475,000.

2.5. The operation of the transitional provisions is explained in section 3 below before consideration in section 4 of the case for their amendment and a suggested amendment to the provisions in section 5.

3. Transitional Provisions

3.1. For the reasons set out in this paper, the transitional provisions will create unnecessary complexity and difficulty for the very businesses which the Chancellor has indicated will benefit from the increase in the permanent AIA limit.

3.2. The transitional provisions are in paragraph 4 of Schedule 2 to Finance Act 2014 which reads as follows:

"Chargeable periods which straddle 1 January 2016

4 (1) This paragraph applies in relation to a chargeable period ("the second straddling period") which begins before 1 January 2016 and ends on or after that date.

(2) The maximum allowance under section 51A of CAA 2001 for the second straddling period is the sum of each maximum allowance that would be found if-

(a) the period beginning with the first day of the chargeable period and ending with 31 December 2015, and

(b) the period beginning with 1 January 2016 and ending with the last day of the chargeable period,

were treated as separate chargeable periods.

(3) But, so far as concerns expenditure incurred on or after 1 January 2016, the maximum allowance under section 51A of CAA 2001 for the second straddling period is the maximum allowance, calculated in accordance with sub-paragraph (2), for the period mentioned in paragraph (b) of that sub-paragraph."

3.3. Under paragraph 4(2), the maximum AIA for a business year which includes 1 January 2016 is the sum of the proportionate AIA limits for the two periods before and from 1 January 2016 if they were treated as separate chargeable periods. So for a business with a year end of 30 June 2016, the maximum AIA entitlement for the whole twelve month period is £350,000 calculated as:

6 month period up to 31 December 2015

6/12 x temporary £500,000 limit = £250,000

6 month period to 30 June 2016

6/12 x new permanent £200,000 limit = £100,000

--------------

Maximum AIA for the whole 12 month period = £350,000.

Note: For simplicity, all calculations in this submission are made in round months rather than actual days.

3.4. For a business with such a 30 June 2016 year end, its effective AIA limit would depend on when in that year it incurred that expenditure:

3.4.1. If it incurred all its qualifying capital expenditure within the period up to 31 December 2015, it would receive AIA on up to £350,000 (calculated as in 3.3 above) but

3.4.2. If it incurred exactly the same expenditure within the period from 1 January 2016, its AIA entitlement would not be either that £350,000 or the new permanent limit of £200,000 but just £100,000 (being 6/12 of the annual £200,000 limit).

3.4.3. The odd outcome in 3.4.2 above is the consequence of sub-paragraph 4(3) of Schedule 2 to Finance Act 2014 (as set out in 3.2 above) which caps AIA on expenditure in the post 31 December 2015 part of the year at the proportionate entitlement of the £200,000 limit.

3.4.4. For a business with a year end that falls earlier in calendar year 2016, the impact of the sub-paragraph 4(3) restriction is even greater. Even for businesses with later year ends, the restriction can mean that the effective AIA limit is less than £200,000. The accompanying Table 1 shows both the maximum AIA for the full year (calculated as in 3.3 above) and the effective AIA cap for expenditure incurred after 31 December 2015 for each relevant business year.

3.4.5. It is apparent from the table that:

a. A business with a 31 January 2016 year end would be entitled to AIA on up to £475,000 if it incurred that expenditure no later than 31 December 2015 but on only £16,667 if it incurred the same expenditure after that date;

b. Whilst the limit for the whole year decreases by £25,000 for each additional month of the business year that falls after 31 December 2015, the AIA cap for expenditure after that date increases by some £16,667 for each additional month;

c. The AIA entitlement for expenditure incurred after 31 December 2015 is never as much as the headline figure of £200,000.

4. Does the sub-paragraph 4(3) restriction matter?

4.1. For any business whose qualifying capital expenditure in the part of the ‘straddling period’ that falls before 1 January 2016 exceeds the entitlement for the whole twelve month period, the sub-paragraph 4(3) restriction has no impact at all.

4.2. For a business that incurs the same level of qualifying capital expenditure in each of the twelve months in its straddling period (or incurs that expenditure in proportion to the number of months up to and after 31 December 2015), there could be an element of restriction in respect of the post 31 December 2015 expenditure but only if that expenditure equated to an annual rate in excess of £200,000.

4.3. It is therefore only those businesses whose qualifying capital expenditure in the straddling period is incurred disproportionately after 31 December 2015 that will have an effective AIA limit for that year of less than £200,000. The actual limit will depend on the year end of the business as shown in the third column of Table 1.

4.4. There are a variety of reasons why a business might be unable or reluctant to arrange its pattern of capital expenditure so as to avoid the sub-paragraph 4(3) cap on its AIA entitlement. These include, in no particular order:

· Unpredictable profitability, for example in a newly established business;

· A seasonal pattern of trading which means that liquidity is tight until the latter part of the year;

· An opportunity for business expansion (which necessitates capital expenditure) occurring in the latter part of the year;

· Successful recruitment of new employees (who require additional equipment) in the latter part of the year;

· An unplanned need to incur expenditure in the latter part of the year following a major failure of equipment;

· Technological innovation introducing new equipment to the market in the latter part of the year;

· Commercial prudence about incurring significant capital expenditure;

· External constraints on expenditure such as bank facilities.

4.5. The features identified in 4.4 above are at least as likely (and probably more likely) to impact the small and medium sized businesses to which the Chancellor has referred (see 2.2 above) as larger businesses. As shown by the third column of Table 1 it is businesses whose qualifying capital expenditure is relatively modest but concentrated in the post 31 December 2015 part of their straddling period that are likely to be most adversely impacted by the sub-paragraph 4(3) restriction. The restriction accordingly bears heavily on small and medium sized businesses with relatively modest levels of qualifying capital expenditure. It also works to the disadvantage of businesses whose capital expenditure timing is based on commercial factors as distinct from tax-mitigation considerations and businesses that are not alerted by advisers to the anomalous arithmetic that results from the transitional rules.

4.6. As the transitional provisions currently stand, consideration of the restriction will be required even in situations where the restriction may not actually apply. Businesses and their advisers will need to determine the precise timing of expenditure and the effective AIA limit for post 31 December 2015 expenditure even where qualifying capital expenditure in the year does not exceed £200,000. Similarly, HMRC officers may need to test the entitlement to AIA for the straddling period by checking contractual details even where the expenditure does not exceed £200,000.

5. A suggested solution

5.1. Given the stated policies behind both the temporarily enhanced AIA limit of £500,000 for periods up to 31 December 2015 and of the new permanent AIA limit of £200,000 for subsequent periods, it is difficult to see that the sub-paragraph 4(3) restriction serves the policy objective of providing an incentive for long-term investment by small and medium sized firms in Britain. Why should a business have an effective AIA limit of between £16,667 and £183,333 for its twelve month straddling period simply because commercial considerations dictate that it is appropriate to incur its capital expenditure in the part of that period that falls after 31 December 2015? Why should such a business have such a lower entitlement to AIA than a comparable business with an identical level of expenditure which is able to plan the timing of its expenditure within the same twelve month period so as to avoid the impact of the restriction?

5.2. In the absence of an obvious answer to either of the above questions, this submission proposes an amendment to the transitional provisions contained in paragraph 4 of Schedule 2 to Finance Act 2014 so that they read as set out below. The amended wording is identified by emboldened and underlined text.

"Chargeable periods which straddle 1 January 2016

4 (1) This paragraph applies in relation to a chargeable period ("the second straddling period") which begins before 1 January 2016 and ends on or after that date.

(2) The maximum allowance under section 51A of CAA 2001 for the second straddling period is the sum of each maximum allowance that would be found if-

(a) the period beginning with the first day of the chargeable period and ending with 31 December 2015, and

(b) the period beginning with 1 January 2016 and ending with the last day of the chargeable period,

were treated as separate chargeable periods.

(3) But, so far as concerns expenditure incurred on or after 1 January 2016, the maximum allowance under section 51A of CAA 2001 for the second straddling period is the greater of:

(a) the maximum allowance, calculated in accordance with sub-paragraph (2), for the period mentioned in paragraph (b) of that sub-paragraph and

(b) the amount (if any) by which the maximum allowance under section 51A of CAA 2001 as amended by Finance (No. 2) Act 2015 exceeds the qualifying expenditure incurred in the period mentioned in sub-paragraph (2)(a)."

5.3. The intention of the suggested amendment is to ensure that:

5.3.1. The maximum AIA allowance for the whole of the second straddling period is unchanged from that shown in the second column of Table 1 but that

5.3.2. A business whose qualifying capital expenditure incurred in the part of its straddling period prior to 1 January 2016 is less than the new permanent AIA limit of £200,000 is entitled to AIA in respect of qualifying capital expenditure incurred in the part of its straddling period subsequent to 31 December 2015 of whichever is the greater of:

(a) the amount it would have been entitled to without this suggested amendment and

(b) the excess (if any) of the new permanent limit of £200,000 over the amount of qualifying capital expenditure incurred in the period prior to 1 January 2016

thereby giving a minimum AIA limit for the whole of the second straddling period of £200,000 regardless of when the relevant expenditure was incurred in that twelve month period.

5.4. The accompanying Table 2 provides a range of paired examples of the outcome of the existing provision and the suggested amendment for different patterns of expenditure in a business year ending on 31 March 2016.

5.5. It will be seen from Table 2 that in relation to a business year ending on 31 March 2016:

a. Where the expenditure in the period before 1 January 2016 exceeds the maximum AIA for the whole year, the AIA entitlement is capped under the suggested amendment in exactly the same way as under the existing transitional provision;

b. Where the expenditure in the period before 1 January 2016 is £150,000 or more, the suggested amendment makes no difference to the AIA entitlement;

c. Where there is no expenditure in the period after 31 December 2015, the suggested amendment makes no difference to the AIA entitlement;

d. Where the expenditure in the period before January 2016 is less than £150,000 and the expenditure after 31 December 2015 is more than £50,000, the AIA entitlement is increased but not beyond the new annual limit of £200,000.

5.6. The extent to which the suggested amended provision might benefit a business would depend on its year end and the precise pattern of its expenditure. The accompanying Table 3 summarises the position. In no scenario would the suggested amendment increase the AIA entitlement for the full twelve month period beyond £200,000.

6. Summary

6.1. The existing transitional provisions appear inconsistent with the policy behind the permanent increase in the maximum AIA.

6.2. They are also capable of producing surprising results and of being misunderstood.

6.3. The amended provision proposed in this submission is more consistent with the policy intention, simpler to apply and likely to require a reduced commitment of time by HMRC officers in checking calculations.

7. The Association of Taxation Technicians

The Association is a charity and the leading professional body for those providing UK tax compliance services. Our primary charitable objective is to promote education and the study of tax administration and practice. One of our key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Drawing on our members' practical experience and knowledge, we contribute to consultations on the development of the UK tax system and seek to ensure that, for the general public, it is workable and as fair as possible.

The Association has over 7,700 members and Fellows together with over 5,600 students.

Table 1

 

 

 

 

 

 

 

 

AIA limit for whole

AIA cap for expenditure

 

12 month period

between 1 January 2016

 

and business year end

Business year end:

£

£

 

 

31 January 2016

475,000

16,667

 

 

29 February 2016

450,000

33,333

 

 

31 March 2016

425,000

50,000

 

 

30 April 2016

400,000

66,667

 

 

31 May 2016

375,000

83,333

 

 

30 June 2016

350,000

100,000

 

 

31 July 2016

325,000

116,667

 

 

31 August 2016

300,000

133,333

 

 

30 September 2016

275,000

150,000

 

 

31 October 2016

250,000

166,667

 

 

30 November 2016

 

225,000

 

 

183,333

 

 

Table 2

Business year end 31 March 2016

 

 

Qualifying Capital Expenditure:

AIA Entitlement under:

Whole

Allocated:

Existing

Suggested

Year

9 months to

3 months to

Transitional

Amended

Expenditure

31.12.15

31.03.16

Provision

Provision

£1,000,000

750,000

£250,000

 

£425,000

Unchanged

250,000

£750,000

 

£300,000

Unchanged

£500,000

320,000

£180,000

 

£370,000

Unchanged

180,000

£320,000

 

£230,000

Unchanged

£325,000

200,000

£125,000

 

£250,000

Unchanged

125,000

£200,000

 

£175,000

£200,000

£250,000

160,000

£90,000

 

£210,000

Unchanged

90,000

£160,000

 

£140,000

£200,000

£200,000

140,000

£60,000

 

£190,000

£200,000

60,000

£140,000

 

£110,000

£200,000

£125,000

125,000

£0

 

£125,000

Unchanged

0

£125,000

 

£50,000

£125,000

£100,000

75,000

£25,000

 

£100,000

Unchanged

25,000

£75,000

 

£75,000

£100,000

£60,000

60,000

£0

 

£60,000

Unchanged

0

£60,000

 

£50,000

£60,000

Table 3

 

 

 

 

 

 

 

Scenarios when the suggested amended provision would be beneficial to a business

 

 

 

Expenditure before

Expenditure between

 

1 January 2016

and

1 January 2016 and business

 

less than:

year end more than:

Business year end:

£

£

 

 

31 January 2016

183,333

16,667

 

 

29 February 2016

166,667

33,333

 

 

31 March 2016

150,000

50,000

 

 

30 April 2016

133,333

66,667

 

 

31 May 2016

116,667

83,333

 

 

30 June 2016

100,000

100,000

 

 

31 July 2016

83,333

116,667

 

 

31 August 2016

66,667

133,333

 

 

30 September 2016

50,000

150,000

 

 

31 October 2016

33,333

166,667

 

 

30 November 2016

 

16,667

 

 

183,333

 

 

July 2015

Prepared 18th September 2015