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TWEd is unsure that HM Revenue & Customs is behind the new Annual Investment Allowance transitional rules...

Well, that’s another tax return filing season over – with HM Revenue & Customs giving itself a big pat on the back that a record number of people filed their tax returns on time. Personally, I preferred the old regime where there would be no penalty if there were no tax due at the end of January. It just seems “wrong” that the penalty can now exceed someone’s actual tax liability.

HMRC’s own figures indicate that there will be over 700,000 taxpayers who missed the deadline – and for whom a £100 penalty is now pretty much a certainty. So I make that the best part of £100million. Bearing in mind that some of HMRC’s tax campaigns are deemed “successful” if they achieve tax yields in the low £millions, it is hard not to see the penalty regime as "a bit of an earner". And then we have the late payment penalties as well – which make £100 seem like loose change.

Next we have a brand new tax – the Machine Games Duty – which kicked off on 1 February. We have already highlighted some of the potentially quite nasty VAT traps implicit in the changeover: possible clawbacks under the Capital Goods Scheme and an effective "double charge" under the Flat Rate Scheme are just two of them.

So having painted it black, why should I find myself in the somewhat uncomfortable position of “sticking up” for HMRC? Well, it has to do with the new Annual Investment Allowance (AIA) rules – the transition up to £250,000 for expenditure after 1 January 2013. Of course that is an inaccurate way to describe the new rules; I recently tried very hard to get a synopsis down in less than a thousand words and failed miserably.

They are somewhat tortuous: the dip down to £25,000 part-way through is a pain. HMRC is getting considerable flak for it.

I infer two things, or perhaps three:

HM Treasury knows how expensive it will be to raise the AIA to such dizzy heights, even if only for a two-year period: it will cost £billions – roughly a third of the Chancellor’s growth budget in the Autumn Statement. So it wanted to get absolutely the most out of the measure that it could: the £25,000 ceiling has been kept in place – despite the complexity of the rules – to ensure that only new investment after 1 January will benefit. It would be too expensive otherwise.

And why 1 January, rather than wait for a full year with the reduced rate? I have basically answered my question of a couple of weeks ago: because the government (perhaps also the economy) cannot afford to wait that long. But the rules effectively block prompt access to the full £250,000 annual rate - arguably hobbling the incentive.

I sense the same ‘art’ behind these rules as drove the changes to Child Benefit. We knew who was responsible for those changes: it was government rather than HMRC. Of course HMRC has a hand in some policy changes but this one, I suspect, was all George. We may never know, unless perhaps it proves successful.

Regards all,

TW Ed