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Capital allowances
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Reforms proposed to capital allowances regime

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Once again the government is consulting on potentially reforming the capital allowances regime, but Steven Bone thinks the options ignore the green agenda.

15th Jun 2022
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With over 25 years of capital allowances experience, I’ve noticed that the process of reform seems to repeat itself at least every decade. So it comes as no surprise that the government is consulting on potential reforms to the capital allowances regime

The government’s stated aim is to foster a new culture of enterprise and growth and to make the UK a more competitive place to invest. In the Spring Statement 2022 the government acknowledged that “the UK’s generosity lags competitors” because “the overall tax treatment provided for capital investment is less generous than the Organisation for Economic Co-operation and Development (OECD) average”. 

The following options were floated in the Spring Statement:

  • Increasing the permanent level of the 100% Annual Investment Allowance (AIA), for example to £500,000. The AIA ceiling has yo-yoed, starting at £50,000 and ranging between a low of £25,000 and the current high of £1,000,000. Despite most of these thresholds typically running for only a year or two, some Chancellors have claimed that their cap was permanent whereas other thresholds were presented as temporary. For example, the £200,000 introduced from January 2016 is purportedly permanent (despite previously operating for just three years until January 2019) but the current £1,000,000 is temporary (despite already running for more than three years) because it has an expiry date that has already been extended once. This would cost around £1bn each year.
  • Increasing 18% writing-down allowances (WDAs) for main pool plant and machinery to 20%, and the 6% WDA for special rate assets to 8%. This is somewhat ironic given that I recall the rates were previously reduced to accelerate tax receipts and at the time the government justified the changes by claiming that the higher rates distorted investment decisions and failed to accurately reflect the true rates of economic depreciation of assets. This would cost £2bn a year.
  • Introduce a First-Year Allowance (FYA) where an accelerated tax write-off is available in the first year (for example, 40% for main pool plant and 13% for special rate assets) followed by normal WDAs in subsequent years. At its peak this could cost £3bn a year.
  • Allowing relief on 120% of the cost by giving an additional 20% FYA followed by writing off the 100% actual cost during the first and subsequent years using standard 18% and 6% WDAs. This could cost £4bn a year.
  • Fully expensing capital expenditure. In other words, a 100% AIA with no expenditure ceiling. This could potentially include all expenditure (whether plant and machinery or not, which has not been made clear by government). No other G7 country has permanently done this. This has the benefits of simplicity and the fastest tax relief, although not necessarily the most relief because the 130% super-deduction or 20% additional FYA mentioned above allow a tax write-off that is greater than the actual expenditure. At its peak it could cost £11bn a year. This option has been considered before and ruled out because it would be prohibitively expensive.

Generosity of incentives

In principle, any improvement to the generosity of incentives for capital expenditure has to be a good thing (subject to relative affordability for the public purse, which is a matter for the Treasury). To help loss-making businesses that cannot immediately benefit from capital allowances or expensing, I would personally like the government to also consider introducing some form of payable or above-the-line tax credit (similar to R&D or land remediation relief tax credits or the R&D Expenditure Credit). I would also like to see a greater focus on incentives for environmental expenditure, repurposing buildings and sectors that need particular economic assistance.

Consultation responses have been requested by 5pm on Friday 1 July and are requested to be submitted on an interactive form.

Gateley Capitus will be responding so if you would like to feed into our response please comment below or get in touch with me or your usual Gateley Capitus contact.

Replies (5)

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By Hometing
15th Jun 2022 16:19

They've been playing hokey cokey with AIA for some time now!

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By Paul Crowley
15th Jun 2022 17:03

Writing down allowances particularly special rate to figure closer to depreciation rates would be on my list
Make it simple 20% or 25%
My traders are small so FYA not a problem given AIA

Is this meant to be the tax cuts that the Imprudent Accountant infers there are murmers about?
(Article in opinion section today)
https://www.accountingweb.co.uk/community/blogs/the-imprudent-accountant...

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By KristianPotts
16th Jun 2022 18:46

I'd love to see a tax credit for loss making or tax neutral individuals and companies. It's always seemed a little unfair that they cannot benefit from Capital Allowances despite the capital expenditure.

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Replying to KristianPotts:
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By Hugo Fair
17th Jun 2022 08:46

Judging by the heat, I presume it's not April 1st? Is it?

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RLI
By lionofludesch
26th Jun 2022 07:18

Is this just another call for ideas which HMRC will ignore?

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