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Push down on accelerator?

Of particular interest in the latest consultation document on corporation tax reform are the provisions on reducing the differences in tax treatment of investment and trading companies, an accrual basis for taxing capital gains on chargeable assets held by companies and the bringing closer together of tax and accounting principles.

This latter proposal in relation to capital acquisitions made by businesses would, at first sight, appear to signal the end of first year or other accelerated allowances for tax purposes as no such accelerated allowance exists under accounting principles. It is a purely tax-related provision.

However, it is made clear in this second consultation document that the Government recognises the need to encourage investment from time to time and so envisages the retention of the capability of introducing special allowances where this would be in line with Government policy.

In deciding whether to bring forward capital expenditure which you know currently qualifies for an attractive first-year allowance, you would need to consider whether you believe the Government will maintain the first-year allowance. Expenditure in the current regime, with the known beneficial tax consequences, should be seriously considered if it is thought that there is a risk that first-year allowances will be abolished (and bear in mind the latest counsel of caution from the Institute of Chartered Accountants), you consider the allowance to be currently attractive and, most important, the acquisition of the capital asset in question can be fully commercially justified. But you need to make this decision in respect of each client.

Your communication with small business clients will then be founded on making them aware that change is possible and will tell them in clear, plain language what that change will mean. Without overstating the possibility that allowances currently given could be taken away (especially given the reassurance stated in the consultation document), it should be ascertained whether, on purely commercial grounds, capital expenditure qualifying for the accelerated first-year allowance at 100 or 40 per cent is justifiable. If it is, then even though the risk of the allowance not being available in the future may be thought to be quite small, the client should be encouraged to act now.

When investing any sum, a business, in the same way as an individual, is making a choice. With any given sum available, most businesses have a number of choices. Some of the more obvious ones are to leave funds on deposit accessible to the company, to invest in other assets (qualifying for tax relief or not), to distribute the funds to shareholders, to pay salaries or bonuses to directors or staff or to provide for directors or staff through contributions to pensions or other savings media. Tax will, of course, be a factor in making these choices but should be very much a secondary one.

The decision should be made based on the relative utility to the business and its owners of whatever is brought into being by virtue of the expenditure. When a decision is made that is other than leaving a sum on deposit, from a financial standpoint the business will be determining that the rate of return that can be secured on the expenditure, either in hard quantifiable financial terms or in softer terms of overall utility and potential future benefit, will be an improvement on what would be returned should the sums be left on deposit.

Attitude to risk will clearly enter into the making of this decision. This calculation will be in even sharper focus if funds are borrowed to facilitate the expenditure. Here, the expected rate of return should, of course, be greater than the cost of borrowing.

This is not to say that all expenditure decisions are made based on such clinical financial terms. Reinvestment in the business is often made on what can only be described as sentimental grounds or at least without fully considering all the alternatives. For many owners of private businesses, after providing for the immediate needs of themselves and their families, the next hungry mouth to feed is the company, regardless of the merits of the expenditure in pure investment terms. The all eggs in one basket principle most definitely applies to many private business owners if you consider their business to be part of their overall asset allocation.

Often, there may be equally competing needs for available funds but only a single sum of money available. Two of these needs may be the need to make further provision for future financial security through contributions to pensions and the more pressing need to invest in capital equipment to regenerate the business to produce more profits that will also have a contributory effect towards future financial security.

As I have mentioned before, it may be possible to do both, provided suitable borrowing facilities are available in connection with the pension fund, self-administered or otherwise. Provided all the necessary conditions can be met (an SSAS must have been in existence for at least two years and the amount borrowed must not exceed more than 50 per cent of the fund value), it may be possible to, in effect, borrow the whole of the new contribution for the purpose of buying required capital equipment.

The business will, in effect, be recycling the contribution by borrowing it back once made and generating double tax relief, that is, on the contribution itself and then on the qualifying capital expenditure.

Naturally, there are other factors that must be taken into account before deciding to do this. The continuing payment of interest and the need to repay the loan at some point ahead of retirement (even though the lender is one&#39s own pension fund) would be two such considerations.

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