News of the Conservative majority well and truly flew in the face of pollster predictions, but the party’s victory has been met with widespread approval from the business community. Whilst his praise for UK SMEs as “growth engines” of the UK economy certainly sweetened small business owners, it’s crunch time for David Cameron on a number of issues, and time to go beyond rhetoric.
One particular issue he shouldn’t rest his laurels on is capital allowances. They are a means of providing tax relief upon capital expenditure incurred by those who own commercial property. Commercial property owners can claim this relief on items such as lighting fittings, heating, pipework and lifts. Essentially, everything that would stay in the building if you were to tip it upside down. If you are entitled to capital allowances, the amount of tax relief you can expect is substantial.
A worrying number of commercial property owners, however, are failing to claim this tax relief. So much so that since April 2014, we have estimated that £2.1bn has been thrown out of the window by those who could have reaped its benefits. And the really alarming thing is that, owing to recent legislation, this money is lost forever.
So, why is this the case – and just what can the new government do to ensure that this tax relief available ends up in the pockets of the small business owners that Cameron has given such high praise?
Simplify capital allowances
If small firms are to continue to drive economic recovery, each need tax investment incentives that are easy to claim. Currently, the capital allowances system is over-complicated, and as a result, doesn’t provide the support that UK businesses need to encourage investment.
While there have been some improvements in establishing which are eligible to claim capital allowances (in which the majority of SMEs would qualify), a huge amount of confusion remains, particularly surrounding the issue of what is needed to begin the process of claiming this tax relief. Should it be the property agent? The lawyer? Or, the accountant? More effort needs to be channelled into clarifying the process of claiming capital allowances. The truth is that busy small business owners are often avoiding the issue because it is perceived as too complex and time consuming.
Read more on tax relief:
- Capital allowances: What you need to know
- How can you tell if your company will qualify for R&D tax relief
- Footballers score tax relief own goal with “aggressive” investments
Publicise capital allowances
It’s not just the matter of people not understanding capital allowances – it’s that swarms of business owners aren’t aware of them in the first place. Unsurprisingly, HMRC keeps this form of tax relief fairly under the radar, which has meant that many commercial property owners have remained in the dark about the amount of money available to them.
This lack of awareness is even more concerning owing to a recent change in legislations. Since April last year (the implementation of the Finance Act 2012) any capital allowances claim must be made before or at the point at which a the property is being bought or sold. If you don’t do this, there’s the risk of these capital allowances being lost forever.
What this means is that it is more important than ever for HMRC to break with the MI5-like attitude to capital allowances, and stop small business owners from labouring under the false impression they aren’t able to afford the costs and capital expenditure necessary to operate fully. In reality, there are lucrative tax reliefs available which could make owning a commercial property feasible.
Restructure the rates of Capital Allowances
Similar to the Annual Investment Allowance (AIA), it is high time the capital allowances rates were revamped. Capital allowances should be relieved at different rates for SMEs and larger companies, as per the structure for Research & Development relief (R&D). This is a fairer way of distributing the tax relief, and allowing SMEs to continue acting as a lifeline of the UK economy.
Enhance the Annual Investment Allowance (AIA)
Further to this, retaining the annual investment allowances at its current level of £500,000 or even an increase to £1m, would benefit SMEs. The chancellor in last month’s Budget accepted the AIA needed to be addressed, as the reduced level of £25,000 was simply not feasible. A higher level will encourage capital expenditure by businesses that have experienced stilted growth since 2008.
The Conservative’s election pledges to cut red tape, treble the number of startup loans and increase the number of startups to 600,000 by 2020 were promises guaranteed to get SMEs on side. To allow small businesses to truly grow and prosper, however, the new government needs go beyond paying lip-service and take some of the suggested steps towards making it easier to reap the rewards of these tax incentives.
Mark Tighe is managing director at Catax Solutions.