Hampshire: Budget tax reform major boost to business

Changes announced in yesterday’s Autumn Budget will hugely increase the benefit of capital allowances against UK property expenditure, says a Hampshire financial expert.

Alun Oliver, managing director of property tax specialists E3 Consulting, of London and Southampton, welcomed Chancellor Philip Hammond’s immediate changes alongside more radical long-term impacts which will become evident in time.

He said: “Many of the items in this Budget will be welcomed by businesses across a range of sectors.

He said: “The confirmed changes to tax will massively increase the benefit of capital allowances against UK property expenditure as well as simplifying the position for small businesses incurring more modest levels of capital expenditure. However, Oliver, whose business is based in Southampton’s Ocean Village, warned: “Careful and timely advice is recommended to ensure full understanding of the impact of these immediate and future changes to the capital allowances rules.

“Taxpayers also need to remain vigilant regarding any unintended consequences of the precise legislation – which will become apparent in due course.”

Budget highlights included:

• Structures and buildings allowance (SBA) – new non-residential structures and buildings will be eligible for a 2% capital allowance for contracts for construction works signed and commencing on or after October 29. The move aims to plug a significant gap in the UK’s current capital allowances regime and improve the international competitiveness of the UK’s tax system.

Oliver said: “While half as generous as the Industrial Buildings Allowances (IBAs) abolished in 2011, this new capital allowances category will provide a very real incentive to property owners to invest further and secure these allowances – against virtually all newly built commercial property.

“For the first time, all new-built commercial property will benefit from tax relief on the entire project cost – albeit some as SBAs at 2%, some as Plant & Machinery Allowances (PMAs) at 18% and Integral Feature Allowances (IFAs) at 8% but reducing to 6% from April 2019.

Clearly, the Chancellor is seeking to encourage UK businesses to relax the purse strings and invest now in UK’s means of production. The new SBAs will be a welcome boost to the property investment sector and all those businesses that own and invest in their own premises.

• Annual Investment Allowance (AIA) – increased to £1 million for all qualifying investment in plant and machinery made in 2019 or 2020 help stimulate business investment.

Oliver commented: “Boosting AIAs to the first £1m for the next two years was partly expected as both the Confederation of British Industry and Institute of Directors has lobbied hard on increasing the AIA cap over a number of years. 

At £1m this will greatly simplify the capital allowances for many Owner Managed Businesses (OMB's) as virtually all the available allowances will be given in the first year – for investments up to about £5m; given that on average some 20% of project expenditure is eligible for capital allowances, notwithstanding the new SBAs which are not eligible for AIAs.”

• Capital allowances special rate reduction (8% to 6%) – From April 2019, the capital allowances special rate for qualifying plant and machinery assets will be reduced from 8% to 6% to more closely match average accounts depreciation. 

Oliver said: The Chancellor has to balance his books and thus there are always some measures taking away from industry, rather than giving to it. Here Integral Feature Allowances (IFAs) and Long-Life Asset Allowances (those for assets of 25-year economic life or more) are both part of the Special Rate Pool given at Writing Down Allowances (WDAs) of 8% per annum on reducing balance basis. These will now be reduced back to 6% from April 2019 (as they were prior to April 2008). 

“While these will reduce the cash flow benefit of these particular allowances – the SBAs will more than compensate for those investors undertaking new commercial projects from Budget day (October 29).

• Enhanced Capital Allowances (ECAs) – The government will end ECAs and First Year Tax Credits for technologies on the Energy Technology List and Water Technology List from April 2020. These ECAs add complexity to the tax system and the government believes there are more effective ways to support energy efficiency. The savings will be reinvested in an Industrial Energy Transformation Fund, to support significant energy users to cut their energy bills and transition UK industry to a low-carbon future. 

Oliver added: “This was a bit of a surprise announcement but recognises that the current system is perhaps more complex than necessary – and often debated with HMRC.

“Transformation of ECAs to link with EPCs or BREEAM ratings would have made more sense to maintain the ‘carrot & stick’ approach to encouraging landlords and building owners to modernise their properties and improve their environmental impact – alongside the MEES regulations.

“That said the introduction of the SBAs makes ECAs a timing difference only and for the vast majority of building projects the 100% AIAs will suffice. So, in all this is really a big simplification of the rules. 

• Enhanced Capital Allowances (ECAs) for electric vehicle charge points to be extended for companies investing in electric vehicle charge points to March 31, 2023, part of the government’s ambition for the UK to become a world leader in the ultra-low emission vehicle market.

Oliver said: “Given the original delay to the introduction of this measure and the Government’s focus on new automotive technologies to reduce diesel and petrol, it is no surprise to see this specific measure extended. This should help businesses across the UK prepare for the increasing take-up of electric vehicles.”

• Personal Allowance (PA) and higher rate threshold – the government will meet its commitment to raise the PA to £12,500 from April 2019, one year earlier than planned. The threshold will remain at the same level in 2020-21 and then increase by CPI. 

Oliver added: “Advancing these changes to personal allowances and the higher rate tax threshold will be broadly welcomed as moving considerable numbers of taxpayers out of income tax or significantly reduced tax liabilities.”

Oliver, who founded E3 Consulting in 2003, also commented on government plans to fix the ‘broken’ housing market by encouraging the building of more homes in the right places – critical to unlocking productivity growth and making housing more affordable. The aim is 300,000 new homes a year.

Other measures include abolishing the cap that controls local authority borrowing for house building, a consultation on planning reform and an independent review of home completions and ‘land banking’.

Oliver added: “These housing and planning measures could again help speed up development and enable town centres to be regenerated and modernised to meet the housing challenge.

“Care needs to be taken though, to ensure that development does not go totally unchecked – resulting in too much of a specific sector – student housing for example?”