Pictured above: Sarah Moss

While many large companies will welcome the corporation tax cut to be announced in the Budget, small companies will lose out from likely changes to capital allowances according to PKF Accountants & business advisers.  

Sarah Moss, Tax Partner at PKF says: "For companies with annual profits above £1.5m the expected cut in the headline rate of corporation tax to 25% is clearly good news. But less profitable companies will make smaller savings and those with annual profits of less than £300,000 will probably lose out."

The corporation tax rate for small companies is set to reduce from 21% to 20%. So any company currently claiming capital allowances1 on investments in plant and machinery is likely to lose overall, if they are withdrawn. 

Sarah says, "If the £100,000 annual investment allowance is abolished, many small businesses will have to re-think their investment plans. In most instances, they will lose more than they gain from the 1% cut in the small companies' rate and may not benefit from the cut in the main rate of corporation tax for many years - if ever."

The Conservative party has long argued that the current regime of tax breaks (capital allowances) to encourage business investment in plant and machinery is too complex and distorts business investment. 

The corporation tax cut and the likely capital allowance changes are expected to take effect from April 2011, although changes from 1 July this year cannot be ruled out. However, all is not lost. Sarah says, "Depending how the allowances are removed there may be an advantage in bringing forward an expected investment or purchase. For example, buying that new machine now should mean that you can claim the annual investment allowance before it is abolished or claim other allowances at current rates before they are phased out or reduced."

Sarah concludes "These changes will hurt many small businesses already struggling in the recession. It is hard enough to find the funds to invest in and build your business as it is: cutting capital allowances effectively puts up the cost of such investments."

For more information on PKF, please visit their website here: www.pkf.co.uk