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Comments from ACCA
February 2008

ACCA welcomes the opportunity to comment on the administrative issues surrounding the implementation of the enhanced capital allowances (ECA) regime. We are supportive of the measure but are concerned that the implementation framework may be too rigidly interpreted by Tax Inspectors.

COMMENTS ON THE PROPOSALS

Environmentally Beneficial Integral Features

We would point out the potential inconsistencies and distortions arising from the inclusion of some technologies and not others, and problems with the law keeping pace with innovation. We note that Government will have regulatory powers to amend the list but for the present only the same two items are included in the draft legislation as were included in the earlier consultation, namely external solar shading and active facades.

We are somewhat concerned that by using such lists HMRC will fail to keep up with changing technology and hinder the type of investments the Government is seeking to encourage. There needs to be a principles-based approach to qualifying items based upon the understandings in the construction industry. If lists are to be used we underline the importance of ensuring that when the definitions are published they can be clearly understood by both taxpayers and HMRC.

To highlight the further inconsistency of the approach external shading devices will qualify for capital allowances, whereas "other equal performing measures" would be excluded. We would also suggest that some of the terms currently used should be change to reflect the types of structures which should be targeted. For example active facades should be classified as double wall ventilated cavity facades.

In general there needs to be greater on going dialogue with those in industry who are involved in this area.

Clarification of the ECA Scheme

We welcome the inclusion of electrical and cold water systems in the list of “integral features” which will qualify and we note that another beneficial side effect will be that many businesses will now be able to access the 100% ECA for items on the approved technology list. For example all owners and occupiers of an office building will now be able to claim ECA on the qualifying elements of a lighting system. We however, seek clarification on whether the full lighting system would qualify.

We are concerned that the proposed system lacks sufficient transparency and a user friendly approach where all can understand exactly when and how they can gain access to the ECA regime.

Broadly speaking we are calling for greater certainty and simplicity of the proposed system so that HMRC and tax payers both know when they are entitled to the allowance and when they are not.

Comments about Integral Features

While we welcome the extension of the rules to include thermal insulation to all existing buildings (other than dwellings) in the list of items of special rate expenditure qualifying for allowances, we again have concerns about scope that must be fully clarified in the published guidance. The definition of thermal insulation in the statute is “adding insulation against loss of heat”. One suspects that when this legislation was drafted 30 plus years ago the target was cavity wall or loft insulation. But in the current context does it mean any measure taken to comply with the appropriate sections of Part L of the Building Regulations or something less than that? We also consider that in a time of global warming we need to consider including measures which keep buildings cool, i.e. which are adaptive to the effects of climate change.

Annual Investment Allowance (AIA)

While we welcome the simplicity of AIA the fact remains that any small or medium sized enterprise incurring more than £50,000 in a year on plant and machinery will lose out at least in terms of cash flow at a time when taxation rates for such businesses will be rising.

We welcome the proposal that businesses will be free to allocate the AIA in any way they wish, for example against expenditure qualifying for the lower 10% rate pool.

We also note that the AIA does not replace the existing 100% ECA scheme but observe that for the 95% of businesses that invest up to £50,000 per year on qualifying expenditure any incentive effect arising from the ECA scheme is lost.

Other Capital Allowance Changes

The withdrawal of IBA, ABA and EZA by 2011is unwelcome. Whilst we appreciate the rationale for not retaining these allowances, many businesses that will be negatively affected by the impact on existing assets remain deeply unhappy about the retrospective nature of the changes. The hotel industry will be particularly hard hit by these and the other changes at a time when Government is presumably looking for that industry to commit to further investment ahead of the 2012 Olympics.

CONCLUDING COMMENTS

While broadly welcoming the proposals, the main concern we have is the lack of consistency and relative rigidity of the measures, added to which we feel that the Government will be unable to keep its guidance up to date with an ever changing technological environment. We believe a more principles based approach to the allowances would work more effectively for both business and Government.

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