A tax loophole which allowed businesses to obtain early tax relief on plant and machinery purchases will be closed with effect from 12 August, the Government has announced .

The provision was originally set to be repealed in April 2012, because it was being exploited to avoid tax. It allowed businesses to accelerate first-year capital allowance claims for plant and machinery so that they could receive early tax relief.

Capital allowances can be claimed on certain business purchases and investments including office equipment, furniture, machines and tools. The allowances can then be deducted when calculating business profit or loss for tax purposes.

The change has been brought forward because of evidence that not doing so could lead to the loss of significant revenue for the Exchequer, as the government has become aware that a scheme was being promoted to exploit the provision before it was repealed, according to the announcement.

"The Government is determined to reduce tax avoidance in order to protect the Exchequer, which provides funding for public services, and maintain fairness for the taxpayer. By ending this loophole today we will preserve important revenue while maintaining a fair system of capital allowances to support business investment," said Justine Greening, Economic Secretary to the Treasury.

Although the change takes effect immediately, legislation will be introduced in the 2012 Finance Bill. A written ministerial statement confirming the measure will be made at the first opportunity after Parliament returns.

HMRC is currently consulting on a proposal that there should be a time limit on when capital allowances can be claimed in respect of fixtures, which are physically attached to a building. Comments can be made on the proposals until 31 August 2011.

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