calling for the abolition of capital allowances (CAs) in the United
Kingdom.
month, and follow proposals by Shadow Chancellor George Osborne to
introduce an unspecified reduction in capital allowances on plant
and machinery. This is part of a revenue-neutral package of changes
including a reduction in the corporation tax rate from 28 to 25
percent.
Abolishing CAs would mean that businesses paid tax on a larger
amount than their true commercial profit. Those making relatively
heavy use of plant and machinery, including equipment lessors as
well as firms in sectors such as transport and IT services, would
be especially hard hit.
Such a package could particularly hit unincorporated SMEs, if
income tax rates across the spectrum were not cut in line with
corporation tax. These partnerships and sole traders could lose CAs
with no compensation from a lower tax rate.
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CAs have been reduced by the present government, especially in
cases where leasing is used.
It could not be said the present system of CAs is perfect. One
feature is the annual investment allowance (AIA) which mainly
benefits SMEs. This provides for a 100 percent write-off in the
year of acquisition for the first £50,000 (€54,000) worth of annual
expenditure on plant by each business or corporate group.
The AIA discriminates against many types of leasing, for it
cannot be claimed by lessors on assets leased in by SMEs. However,
it is available to SMEs on facilities like hire purchase or
long-funding leases where it is the customer rather than the
finance company that claims CAs.
Scrapping CAs would mean there was no longer any advantage or
disadvantage for any particular form of finance. Some differences
would remain under VAT, where European rules have always prescribed
different treatment for finance and operating leases compared with
other forms of finance.
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By GlobalDataThe main effect of scrapping CAs would be to discourage all
forms of investment in plant and machinery by disallowing its cost
for tax.
