Under the life of the last Labour Government there was constant tinkering with capital allowances (the tax allowances given to businesses for capital purchases, such as plant, equipment, vehicles, etc) in just about every Budget. Most small businesses really had no idea where they stood with capital allowances.
The system can be simplified in two ways: –
1. All small businesses should be entitled to 100% first year allowance for capital purchases. In any case, we are effectively just about there already with the £100k annual investment allowance. Few small businesses spend more than that in capital equipment every year. If they do, then congratulate them by giving them the tax relief!
2. For all other businesses replace capital allowances with accounting depreciation. After all, if it is good enough for the shareholders, why is it not good enough for the Taxman. Of course, the Taxman will argue that the two are different over the short term and that depreciation is open to manipulation for tax purposes. Tough – they generally even out over the long term.
Why is this idea important?
It will produce a fairer system that is easy for all businesses to understand and administer.
HM Revenue & Customs will also be able to focus their time better on more important issues rather than constant bickering with tax advisors as to whether in their opinion an expense is revenue or capital and whether the right capital allowances have been used.