The U.K. government has confirmed that it will extend a temporary annual investment allowance (AIA) increase beyond the end of 2020 to encourage businesses to invest in plant and machinery as the COVID-19 pandemic continues.
Financial Secretary to the Treasury Jesse Norman announced a slew of tax policy changes in a written ministerial statement published November 12, including updates on current and future public consultations and draft legislation related to Finance Bill 2021.
Chief among the announcements was that businesses will be allowed to claim up to £1 million in tax relief on plant and machinery capital investments until January 1, 2022. “It is vital that we support business through the difficult months ahead,” Norman said in a November 12 release. “Extending the [AIA’s] £1 million cap will give businesses the confidence they need to invest into next year, helping them to grow whilst benefiting the wider economy too.”
Under the U.K. AIA, companies may deduct the costs of plant and machinery from their profits before tax, up to a specific threshold. The AIA limit had been reduced from £500,000 to £200,000 in 2016. It was then increased to £1 million in the October 2018 budget for expenditure in 2019 and 2020. That increase was set to expire on December 31, dropping back down to £200,000, prompting organizations like the Association of Taxation Technicians (ATT) to urge businesses considering purchasing capital equipment to do so before the end of the year in case the government didn’t extend the deadline.
The decision will also support businesses as uncertainty over the COVID-19 pandemic persists and will simplify taxes for 99 percent of businesses that make qualifying investments of up to £1 million annually, Norman added in his ministerial statement.
The move is “particularly positive and provides a vital incentive for businesses of all sizes to commit to capital investment,” Andrew Titchener, head of tax policy at the Confederation of British Industry, said. “This kind of investment will be crucial to help firms grow in the long term and is also a vital ingredient for accelerating the U.K.’s post-pandemic recovery.”
While the ATT welcomed news of the extension, it also urged HM Revenue & Customs to revise the rules to avoid complexity when the temporary AIA limit increase eventually ends.
The break would certainly benefit businesses that have a high level of qualifying capital investments, but for the vast majority of businesses, it would only introduce complexity into their spending plans, according to Will Silsby, an ATT technical officer. For those businesses, especially ones with year-end dates other than December 31, “it’s actually an annoyance, and there’s an opportunity now to get rid of that annoyance,” Silsby told Tax Notes.
If Norman had not announced the extension, then a hypothetical business with a year-end date of March 31, 2021, would benefit from an £800,000 limit if it made any qualifying expenditures during the last nine months of 2020, according to Silsby.
However, the business's AIA limit in the first three months of 2021 would only be £50,000, even if it didn’t spend anything in the previous nine months, Silsby added.
As a result, the ATT recommended that HMRC allow businesses to opt out of their entitlement to the £1 million limit and rely on the standard £200,000 cap. Alternatively, HMRC could introduce an automatic £200,000 AIA cap for the whole accounting year in which December 31, 2021, falls, the ATT added.
Norman’s announcement was a sensible one, “but it’s easy to exaggerate its significance to the majority of businesses,” Silsby said. “What business wants is stability, so they know how to plan around things.”
Other Announcements
Norman also said implementation of a new requirement for large businesses to notify HMRC of uncertain tax treatments will be delayed until April 2022.
The measure, which was first announced as part of a package of tax policies outlined in the Conservative Party’s general election manifesto in November 2019, would have required businesses with an annual turnover of more than £200 million or a balance sheet total of more than £2 billion to notify HMRC when they take a tax position that HMRC is likely to challenge.
The requirement was originally planned to take effect starting April 2021, but the measure proved to be controversial, drawing a high uncertainty rating from the U.K. Office for Budget Responsibility and sharp criticism from U.K. tax bodies. As a result, HMRC has been reconsidering the measure.
Norman noted that the delay will allow the government more time to refine the policy and related legislation in consultation with stakeholders and will leave more room for businesses to prepare for the change.
Other announcements include the government’s intention to start a consultation in 2021 on further measures to target promoters of tax avoidance schemes; a consultation on raising standards for tax advice by requiring tax advisers to hold professional indemnity insurance, among other measures; and a consultation on Making Tax Digital for corporation tax, which closes on March 5, 2021.
Norman had announced in July that the Making Tax Digital program will be extended to all VAT-registered businesses with turnover below the £85,000 VAT threshold in April 2022 and will apply to taxpayers that file self-assessment income tax returns for annual business income or property income of more than £10,000 in April 2023.
A technical change to off-payroll working rules will also be introduced in the next finance bill, according to Norman. That change will “ensure the legislation operates as intended from 6 April 2021 for engagements where an intermediary is a company,” he said, adding that the revision would fix an unintentional broadening of the definition of an intermediary.
HMRC also published on November 12 consultation outcomes and draft legislation related to Finance Bill 2021 on the tax effect of withdrawing LIBOR and other benchmark rates, revisions to the hybrid and other mismatches regime for corporation tax, prevention of research and development tax relief abuse for small and medium-size enterprises, introducing a new plastic packaging tax, and legislative changes to address construction industry scheme abuse.