The Chartered Institute of Taxation (CIOT) is warning the government that constant tinkering with ‘left field’ changes to tax rates and allowances undermines the consistency and predictability that taxpayers and businesses crave – and risks reducing international competitiveness, even where the substantive changes are intended to increase it. The note of caution comes as a number of changes to allowances for business are quietly working their way through Parliament in Finance (No.3) Bill.
The CIOT says that such surprise changes, without prior consultation, and especially where they have immediate effect, create uncertainty and are both unwelcome and disruptive to taxpayers. This is compounded when the full package of law and guidance are not finalised by the time of the announcement, meaning that it is unclear exactly how the measure will operate and who it will affect.
John Cullinane, CIOT Tax Policy Director, said:
“Tinkering constantly with rates and allowances in unexpected ways undermines the principles of stability and certainty that taxpayers need, and reduces the international competitiveness of the UK’s tax system.”
Within the Bill is the Budget 2018 announcement that, from April 2019, the capital allowances1 special rate for qualifying plant and machinery assets will be reduced from eight per cent to six per cent. The stated aim is to match it more closely with average accounts depreciation.2 The new reduced rate still gives tax relief for investment in these assets, but over a longer period of time. Inevitably this will impact the return on investments already made in the period when the old, higher rates of allowance were in force, says the CIOT.
The change was also intended to help finance the Budget 2018 announcement of the new Structures and Buildings Allowance (SBA), available for expenditure on new non-residential structures and buildings (which takes effect from Budget Day, October 29 2018).
John Cullinane said:
“It is right to give relief against tax on profits for investment in structural buildings, as it is right for any expenditure incurred for genuine business purposes where there is no specific public policy reason to deny it. Whether this is also the government’s broad aim, or it has some other one, its first step should be to set out what it is trying to achieve in a blue skies consultation so that businesses and individuals can comment. Whatever is decided, at least they will then have a clear sense of the direction in which things are likely to head when making decisions which will be affected over the life of an investment by many detailed tax rules - each of whose shelf life is often extremely short.
“It is particularly regrettable that this proposal seems to introduce relief only on the basis of yet another costly exercise of asset classification required only for tax purposes; something cautioned against by the Office of Tax Simplification (OTS) in its evidence-based review of capital allowances.
“Initial blue-skies consultation is part of the government’s stated framework for tax changes, but it is all too frequently skipped over, to the detriment of effective tax policy making. This was one of the themes of the Better Budgets report published last year by CIOT, the Institute for Fiscal Studies and the Institute for Government.”3
The CIOT has also drawn attention to the frequency of changes to the Annual Investment Allowance (AIA).
John Cullinane explained:
“In just over ten years, the level of the allowance has changed five times, to amounts ranging from £25,000 to £500,000. It is currently £200,000; being set at this supposedly ‘permanent’ level in the Summer Budget 2015. Budget 2018 saw a time-limited increase in the allowance to £1 million, from 1 January 2019 to 31 December 2020, after which it is suggested it will revert to its current level of £200,000. Affected businesses making long-term plans will just have to guess what the government will really decide for periods beyond that, or indeed, on past form, what further changes might be made before that time expires.
“The right level for AIA is a matter of political judgment but it is damaging if it is repeatedly altered, and it can be complex where a business’s accounting period spans changes in the AIA. This can result in a lower amount of AIA being available than expected. The unrepresented or ill-advised taxpayer may fall foul of these complexities. It would be greatly preferable if the Chancellor were able to give greater longer term stability to its level.
“We appreciate that funds are always limited and Chancellors have a difficult job in working out their sums. But that makes it all the more important that money spent on business allowances is directed to greatest effect. The consultative route is the way of less misdirected haste but more real speed and traction to a well understood destination.”
Notes for editors
1. You can claim capital allowances when you buy assets that you keep to use in your business, As well as plant and machinery, you can also claim capital allowances for: renovating business premises in disadvantaged areas of the UK, extracting minerals, research and development, "know-how’’ (intellectual property about industrial techniques), patents and dredging.
2. Although the Chancellor in his Budget speech also stated that this reduction would part-fund the Structures and Buildings Allowance (SBA). The Government claim that the capital allowances package announced in the 2018 Budget will provide around £1 billion of additional support to businesses over the next six years.
3. The Better Budgets report can be found here
4. The Chartered Institute of Taxation (CIOT)
The CIOT is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it – taxpayers, their advisers and the authorities. The CIOT’s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer.
The CIOT draws on our members’ experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT’s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work.
The CIOT’s 18,400 members have the practising title of ‘Chartered Tax Adviser’ and the designatory letters ‘CTA’, to represent the leading tax qualification.
Contact: George Crozier, Head of External Relations, 0207 340 0569 or GCrozier@tax.org.uk
(Out of hours: 07740 477374)