Press Release

POOLING CAPITAL ALLOWANCES

John Healey Mp

Financial Secretary

HM Treasury   

1 Horse Guards Road

London SW1A 2HQ

 17 May 2007

 MAH/ka

 02074209616

 

POOLING CAPITAL ALLOWANCES

 

The Chancellor's Budget announcement of a new corporation tax regime, including significant changes in capital allowances, will have important implications for FLA members and their business clients.  We understand from your officials in HMRC that a consultation paper on the regime will be issued late in the summer.  The FLAS will respond to that, of course, but there are some points I would like to draw your attention now.

 

In the first place, we have heard from HMRC that the new rate will be applied to existing expenditure already in the general pool as well as new expenditure.  There will be no grandfathering of expenditure in the pool and there will not be an "old" 25% general pool and a "new" 20% general pool.  There will be the one "general" pool but the rate of allowance will fall from 25% to 20%.

 

This means of course that transactions that have already been entered into will be taxed more heavily, in respect of the new allowance structure.  The rate cut will offset that cost often, but not always.  In some cases the asset finance industry will take that hit because the contracts are arranged in that way.  But many contracts - including many in the SME market - are arranged so that the client takes the risk of any changes in taxation (and the deals have of course been priced to reflect that).  Thus many SMEs face a further increase in their asset coast through higher rents, as well as the increase in SMEs' marginal rate.  They are in effect, through the law of unintended consequences, contributing to the rate cut for larger companies.

 

This will also, frankly, be an administrative nightmare to organise for lessors and their clients.  There is no precedent for changing allowances retrospectively in the way HMRC is contemplating.  Existing systems cannot so this easily, if at all.  Major member are not even confident that it can be done.

 

In the circumstances we believe that it would be much fairer to gandfather the existing pool and start a separate 20% pool.  Appropriate arrangements would be needed:

 

i) to deal with disposal proceeds; and

 

ii) to avoid anomalies on exhaustion of the old 25% pool, perhaps along the lines used on termination of a single ship pool (s 132 CAA 2001)

 

I will not burden you with the detail on these points, but we would of course be glad to discuss them with your officials.

 

The uncertainty stemming from the lack of any detail on the planned transitional arrangements is causing considerable difficulties in the market.  It is particularly unfair to small and medium ticket lessors were standard documentation is used and where the computation and adjustments that they may be required to make would be out of all proportion to the amounts involved.  It bears heavily on them in relation to new business being written now that, though they know the rates of corporation tax and capital allowances, they may have to go through the immensely expensive process of computing and implementing adjustments on account of the way the transitional arrangements are introduced.

 

It would be helpful if a consultation paper on transitional arrangement could be issued soon, before the main paper, to reduce this uncertainty.

 

Martin Hall

Director General