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Overhaul of capital allowances tax relief under review

The government has set out proposals to reform the capital allowances regime to encourage more business investment with a radical option to introduce full expensing of main rate plant and machinery


Various options are under consideration, including increasing the permanent level of the annual investment allowance, increasing the rates of writing down allowances, and the introduction of general first-year allowances (FYAs) for qualifying expenditure on plant and machinery, an additional FYA and permanent full expensing. According to OECD data, UK companies invest just 10% of GDP each year, compared with 14% in competitor countries, illustrating that the tax system does not reward investment as much as other countries do. The most expensive proposal centres around reform of full expensing, which could cost up to £11bn a year to operate. This would be the costliest measure as it would allow all qualifying expenditure to be written off in the year the expenditure is incurred and would be uncapped. An option is to introduce full expensing of main rate plant and machinery and a 50% FYA for special rate plant and machinery. No other country in the G7 has implemented this on a permanent basis and it risks incentivising inefficient, low-return debt-financed investment, the Treasury said. The Chancellor is calling on businesses of all sizes to have their say, after his Spring Statement pledged to look at how to sustainably cut and reform business taxes ahead of the Autumn Budget. The annual investment allowance (AIA) allows most businesses to deduct the full amount of qualifying expenditure up to a set level to arrive at taxable profits. The tax relief can be claimed on most plant and machinery expenditure but excludes expenditure on cars. The permanent level of the AIA is set at £200,000 per year, which has been temporarily increased to £1m per year between 1 January 2019 and 31 March 2023. An option is to increase the permanent level of the AIA from £200,000 to, for example, £500,000. Writing down allowances (WDAs) spread tax relief over multiple years by allowing businesses to deduct a percentage annually from a relevant pool of qualifying expenditure to arrive at taxable profits. Most expenditure is added to either the main pool or the special rate pool, where WDAs are available at 18% and 6%. An option is to increase the rates of WDAs from 18% and 6% to 20% and 8%. First-year allowances (FYAs) allow businesses to deduct a percentage of qualifying expenditure in the year the expenditure is incurred. FYAs are uncapped and do not count towards the AIA limit. Most FYAs provide 100% capital allowances for qualifying expenditure on specific new plant and machinery or for specific regions. The government is considering an option to introduce general FYAs for qualifying expenditure on plant and machinery, for example a 40% FYA for expenditure on main rate and a 13% FYA for expenditure on special rate plant and machinery. In order to extend the scope of the regime, the document also sets out a proposal to introduce an additional FYA, which would allow both a percentage of qualifying expenditure to be claimed in the year the expenditure is incurred and 100% of that expenditure would still be available to be pooled with WDAs claimed in the normal way. This would provide relief above the amount of qualifying expenditure spread over time. Where an AIA claim is made on an amount of expenditure, an additional FYA claim could not be made on the same expenditure. However, this proposal comes with a warning that it could lead to tax avoidance. As an additional FYA would relieve expenditure above the asset acquisition cost, ‘the design of this measure would need to be considered very carefully to prevent abuse’, the consultation stated. The option under consideration is an additional FYA rate at 20%. The government would welcome evidence from stakeholders on how companies make investment decisions, the relative importance of capital allowances in those decisions, and how they are taken into account, such as by reference to net present values, cash flow benefits or impacts on effective tax rates. It also wants to incorporate the latest evidence on the impact of the super-deduction into its decision-making. As part of this, the government is interested in views on how the super-deduction has affected the investment decisions of businesses. Chancellor Rishi Sunak said: ‘I want to build on the momentum of the super-deduction to drive and sustain growth in the UK, and we’re committed to doing that through cutting and reforming investment taxes. ‘Today we take another step forward in delivering on that – and I encourage businesses of all sizes, right across the UK, to have their say.’ When the plans for reform of the capital allowances regime was first suggested at the Spring Statement, Michael Steed, co-chair of ATT’s Technical Steering Group, said: ‘This proposed engagement of the government with businesses and other stakeholders has the potential to create a stable system of capital allowances which encourages investment, meets the varying needs of different types and size of businesses and is easier to understand. That objective is only achievable if the discussion involves a wide range of stakeholders and the discussion itself is wide-ranging. ‘The current capital allowances system is confusing. Too much depends on the precise timing of expenditure, fine statutory distinctions between similar types of asset and the nature and structure of a particular business. It is also subject to frequent changes, making decisions on expenditure more complex.’

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