SMEs Unaware of Capital Allowances

Tax

Just one in three small businesses are aware that they can reduce their tax bill by claiming allowances for outlay on new equipment, according to research from Cambridge University’s Centre for Business Research (CBR).

Tax

The CBR survey of 2,500 small firms also revealed that of the third of small firms that were aware of capital allowances, just 5% were taking advantage of them.

The report blames the Government’s failure to promote capital allowances and has prompted calls for a change to the system. Stephen Sklaroff director general at the Finance and Leasing Association (FLA), which sponsored the research said:

“The survey shows that HM Treasury needs to rethink the current capital allowance regime. More needs to be done to spread awareness among SMEs, and the same allowances should be available for both leased and purchased assets. This would lower costs for small businesses, and provide the economy with a much–needed investment boost at just the right time.”

Businesses can claim capital allowances on certain purchases or investments, such as machinery, property, and research and development. Firms can deduct a proportion of these costs from their taxable profits and reduce their tax bill.

According to the FLA, the current capital allowance system does not support the typical pattern of SME investment, which often involves leased assets that are ineligible for capital allowances, rather than outright purchase.

Sklaroff added that if capital allowances could be transferred when a company leases an asset rather than purchases it, the number of SMEs that make use of the scheme would be much greater.

“The increased allowance would lead to lower rental payments for the business, and would encourage investment, particularly in environmentally–friendly assets, where 100% of the cost of the investment can be claimed as an allowance. At the moment, the lessor can only claim 25% of the cost of the investment back.”

Responding to the results of the survey, an HM Treasury spokesman said that the government did not believe that the current capital allowance regime for SMEs was failing.

“Take–up of capital allowances by SMEs is between 50 and 60%. The capital allowances system is a long–established and familiar system, which is well liked and understood by the majority of businesses”.

“Furthermore, the system has been made even more generous by changes introduced from April this year,” he added.

Since April 2008, small businesses buying equipment can claim a 40% annual allowance, while firms investing in green assets can claim first year allowances of 100%.

For more information on capital allowances visit the HM Revenue & Customs website

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