CIOT on full expensing extension, VAT threshold and R&D panel

Full expensing for leasing

CIOT has welcomed today’s announcement¹ that the government will seek to extend full expensing to assets for leasing when fiscal conditions allow.

CIOT Director of Public Policy, Ellen Milner, commented:

“When the government announced the introduction of permanent full expensing at Autumn Statement 2023 we welcomed this as a move that enhances simplicity, stability and the incentive to invest in plant and machinery. But we pointed out that the exclusion of leased assets was a limitation of the new regime¹.

“While we welcome this proposed extension, we would still like to see the government look at what is eligible for capital allowances more generally.

“Although there currently is a technical consultation on wider changes to simplify the UK’s capital allowances legislation, this is disappointingly limited in scope². The consultation is focused on simplifying, condensing or reducing the legislation relating to capital allowances for expenditure on the provision of plant and machinery. While this is welcome, it misses the opportunity to consider, for example, other capital allowances (such as structures and buildings allowances), the scope of expenditure that is eligible for capital allowances and the rates are out of scope of the consultation.”

VAT threshold increase

From 1 April 2024, the government will increase the VAT registration threshold from £85,000 to £90,000.

Ellen Milner commented:

“This modest increase in the VAT threshold will simplify the position for some small businesses by relieving them from the costs and obligations of the VAT system, though we note that inflationary increases in the threshold since it was frozen in 2017 would have given an index-linked threshold of some £110,000.”

“However there is nothing in the Budget to address any of the issues created by the UK’s high VAT threshold. In particular it can be a barrier to business growth for those whose turnover is approaching the threshold. This is seen particularly in businesses that sell services directly to consumers (eg plumbers, hairdressers), where it may not be possible to simply increase prices by 20% VAT as they would become uncompetitive. Where small businesses have to absorb some of the VAT charge into their pricing, VAT registration may become an immediate cost, and the business must try to grow quickly to just to generate the income lost to VAT; if the business is a self-employed sole trader, this means working more hours to receive the same income.

“The CIOT would like to see HMRC consider how to encourage businesses nearing the VAT threshold to continue to grow, possibly by a smoothing mechanism or another simplification.”

Research and development (R&D) – expert advisory panel

The Chancellor has announced an ‘expert advisory panel’ to support the administration of R&D tax reliefs.

Ellen Milner commented:

"This panel sounds like a positive step.

“In recent years R&D has become a contentious area for HMRC and taxpayers, with HMRC’s volume compliance approach resulting in legitimate claims being rejected, undermining the underlying objectives of investment in innovation and economic growth because businesses are put off claiming relief to which they are entitled.

“As we move towards the new merged scheme for R&D tax relief, assistance such as that suggested by this new panel could be helpful in providing clarity as to what qualifies for the relief.

“The new merged scheme will come into effect for accounting periods beginning on or after 1 April 2024³. Comprehensive guidance is much needed for certainty, consistency and to enable people to get the application of the new rules right. The expert panel could help with this. However, we hope that the role of the panel will go wider and help with the training of caseworkers at HMRC, for example, to ensure that the rules are applied consistently by HMRC and address some of the issues that we have seen in the compliance approach by HMRC.”

Notes

1            See CIOT press release: Permanent full expensing big step towards ‘simple, stable, generous’ system (tax.org.uk). Other limitations of full expensing are –

• It only applies to expenditure on plant and machinery so will not help businesses that invest in other things – for example, structures and buildings or mineral exploration and extraction.
• It only applies to corporates, so it will not benefit partnerships of individuals such as farming partnerships, that may have significant capital investment in equipment such as large dairy facilities, and accounting or law firms that may wish to invest in their IT infrastructure.
• It is unlikely to be helpful to project companies that are loss making in the first few years of a long-term project. This is because claiming the full expensing relief will only increase the amount of losses that will then be restricted in subsequent years as a result of the corporation tax loss restriction rules.
• Full expensing is only relevant to the 1% of companies whose qualifying expenditure on plant and machinery is above £1 million a year. The remaining 99% already get full relief from the Annual Investment Allowance so gain no additional benefit from full expensing.

2            Autumn Statement 2023 – Permanent full expensing – technical consultation - GOV.UK (www.gov.uk).

3            The Finance Act 2024, Schedule 1 (Research and Development) (Appointed Day) Regulations 2024 (legislation.gov.uk) were made on 4 March 2024, confirming that the appointed day for the new merged scheme is 1 April 2024