An increase in the Annual Investment Allowance (AIA) will lead to error and confusion amongst small firms, tax experts have warned.
Under proposals announced in last year’s Autumn Statement, the AIA was increased
from £25,000 to £250,000 for a two-year period from 1 January 2013, to allow small businesses to claim full tax relief on eligible capital expenditure.
However, in its response to HMRC on the draft Finance Bill provisions on the AIA, the Association of Taxation Technicians (ATT) has warned that the way the AIA is calculated and the fact that different businesses will have different accounting year ends could cause small firms to make mistakes.
The ATT stated that the limit on qualifying expenditure can be less than £25,000 depending on the firm’s accounting year end and the level of its qualifying expenditure incurred before 1 January 2013.
In addition, it said that the combined effect of the temporary increase and the reduction in the AIA limit from £100,000 to £25,000 from 1 April 2012 could cause further confusion.
ATT president Yvette Nunn said that the proposals are well-intentioned but will be very problematic for small firms.
"The arithmetical complexities involved will lead to error and confusion and result in increased professional costs for businesses and an unnecessary diversion of HMRC resources into policing the cliff edges at the critical dates."
"The majority of SME businesses spend far less than £250,000 every year. For them, it would be far simpler for the old £100,000 annual limit to run through to 31 December 2014. In that way, there would be only one cliff edge.
"So we are urging the government to allow businesses to elect out of the confusing varying limits and into a flat limit of £100,000 a year from April 2012 for the whole affected period. We think that this would work well for businesses, HMRC and the economy."