Schemes designed to encourage smaller firms to invest in new equipment and plant are too complicated and are doing little to boost business growth.
That was the finding of a new study carried out by the Open University.
Capital allowances enable firms to write down some of the monies paid out in purchasing new equipment against taxable profits.
But the Open University’s latest survey of small businesses revealed that many firms struggle to come to grips with the complexities of the system and are, as a result, missing out on tax breaks.
The research, which took in some 950 firms, revealed that just 8 per cent of respondents thought the rules governing capital allowances were easy to understand.
Some 19 per cent rated them as acceptable, 31 per cent described them as complicated, while 42 per cent had no view or simply left decisions to their accountants.
More worringly, four out of five firms (80 per cent) declared that capital allowances had no effect on their investment decisions, a figure that indicates the tax relief is not acting as an incentive for growth.
The danger to the overall economy is that many smaller enterprises could end up lacking the equipment to compete in a global and demanding market.
Meanwhile, there are changes afoot to the capital allowance system. Under the existing rules, first year allowances mean that firms can set investments of £100,000 against tax. But as from April 2012, that upper limit is to be reduced to just £25,000.
One possible way of simplifying the regime is to confine tax relief to the year of purchase so that firms are not having to claim capital allowances across a number of years.
The Finance and Leasing Association (FLA) has produced data showing that asset finance lending grew by 25 per cent to £1.7 billion in May compared with the same period a year ago.
Julian Rose, head of asset finance at the FLA, said: “If small firms are to drive the economic recovery, they need tax investment incentives that are simple to claim.
“The Open University report shows that the capital allowances system is over-complicated and falls short of providing the support that UK businesses need to encourage them to invest. But the Government must simplify capital allowance to help many more of Britain’s SMEs to invest in new equipment or upgrade their existing equipment.”
