It’s been a long time since businesses could be sure that they would get full tax relief for any and all investments they make in plant and equipment.
Not since the latter part of the 1970s have businesses been able to say that any machinery they buy would automatically attract full 100% tax relief. But that is in effect what George Osborne has done in his budget today. By raising the annual threshold for Annual Investment Allowance, (AIA), to £500,000 from £250,000 he has made full capital tax allowances available to the vast majority of small and medium sized enterprises in the UK!
The Chancellor announced that from 1st April 2014 the limit, which was to expire on 31st December 2014, will be doubled and will be extended until 31st December 2015. This was the major surprise of the Budget and has to be a very welcome development for such businesses. Of course many small businesses will need to be aware that if they do make significant qualifying investments this will inevitably mean that the tax bill for their following year will go up as their payments on account will have been substantially reduced. Funds will still need to be put aside for this.
It is also inevitable, (I suspect), that there will be “transitional provisions”, so much beloved of tax draftsmen, so that not all businesses which invest more than £250,000 will actually qualify for the full £500,000 allowances.
A knock-on effect of this change will be that most small businesses investing in property will not need to be too concerned about the difference between ordinary plant and machinery which goes into their general “pool” and attracts 18% allowances and “integral features” which have to go into the “special rate” pool attracting only 8% annual allowances. The AIA can be used to soak up integral features so the difference will become academic for most SMEs, another welcome relaxation.
Another change which also looks likely to benefit many owners of small businesses is the proposal on pensions which at first sight appears to say that pensioners will be able to take their entire pension pot on retirement, subject to income tax for amounts over £30,000, rather than buying an annuity. Listening to the Chancellor he said that no-one will be obliged to buy an annuity! I’m not sure I quite believe this and suspect that when we get right into the small print there may still be some restrictions; but if he is to be believed then it introduced a brave new world of very significantly flexibility for pensioners in the future. Is this good or bad news? It seems hard to take a negative view here but perhaps a word of warning is appropriate. People will still need pensions and their enthusiasm for simply taking it all in cash and then making their own choices about how to invest it might perhaps have to be tempered with some caution. I anticipate a lot more work for investment advisers in the future, something which perhaps many of us have become cynical about over the last twenty years or so dare I suggest?
Contributed by Russell Cockburn who presents tax courses and webinars for Quorum Training.