The Annual Investment Allowance will rise from January 2013 for two years, up from the previous threshold of £25,000 to help encourage small businesses to invest.
The AIA, which was reintroduced at a lower level in 2008 after being abolished by chancellor Nigel Lawson in 1984, gives firms tax relief on up-to £250,000 that they spend each year investing in their businesses.
Calculations from tax experts shows the cost of capital for smaller firms will fall by 10.8 per cent over the life of this parliament under the plan. If kept permanently, it would result in a seven per cent increase in investment by small companies in the long run.
Federation of Small Businesses national chairman John Walker said: “This is a step in the right direction and recognition of the important role small firms will play in the recovery.”
Chancellor George Osborne told the commons yesterday the allowance would “cover the total annual investment undertaken by 99 per cent of all the business in Britain”.
The move is a departure for the chancellor, who up until 2010 had advocated scrapping the allowances completely.
“This is undoing the Lawson reforms. It’s going back on what Lawson did in 1984,” Oxford professor Michael Devereux said yesterday.
The Office for Budget Responsibility yesterday said the measure would contribute to lower tax receipts from 2.2 per cent of GDP to two per cent.
But Grant Thornton tax expert Martin Lambert said: “It may be of limited use. In the current climate many small businesses struggle to spend more than the £25,000 allowance they have now, let alone the new level of £250,000.”
Annual investment allowance
Q and A
Q What is the Annual investment allowance (AIA)?
A The AIA give companies tax relief on tool and machinery purchases they make each year . It was re-introduced by chancellor Alistair Darling in the 2008 budget with a £50,000 limit and increased to £100,000 in the 2010 budget.
Q What has changed with the allowance after yesterday’s announcement?
A Chancellor George Osborne originally watered down the rate to £25,000 in April 2012 but yesterday announced that firms could get tax relief on up to £250,000 of investment for the next two years.
Q Who will be affected by the change?
A Small and medium-sized enterprises. Osborne said it will cover investment by “99 per cent” of businesses in Britain. Virtually all plant and machinery qualifies for the allowance, although cars and gifts do not qualify.
Q How will these changes impact businesses?
A The change equates to a 10-fold increase in the amount of investment firms can make tax free. The Office for Budget Responsibility said it would have a “very small impact” on output.