25 July 2018
The Office of Tax Simplification (OTS) has recently completed its review into the future of capital allowances. Its verdict: capital allowances will be hanging around for the foreseeable future! The OTS had previously indicated that capital allowances could be scrapped, with tax deductions instead following the depreciation in the accounts. Although the OTS identified benefits to the accounts-based approach, it felt that the disruptive effects of such a wholesale change would be too great.
Below, Jennie Moore, manager in our tax department, outlines potential improvements to the scheme. Jennie has 11 years’ experience in all manner of taxation issues with particular expertise in the business and corporate tax matters of both groups and individual companies.
Ways to improve capital allowances as outlined by the OTS:
- The report recognises that around 1.2 million businesses spend less than the Annual Investment Allowance (AIA) (currently £200,000 per annum). Simplification could be achieved if the scope of the AIA extended to all assets acquired for the business (excluding land and dwellings). This removes the complication of boundaries and thresholds for smaller business. For example, cars and buildings are currently excluded from AIA and, therefore, removing this exclusion could simplify the regime.
- The scope of capital allowances could be extended to include all business assets for all sizes of business. The analysis of capital expenditure is currently a complex, time-consuming area as there is a cliff edge between receiving some relief and receiving no relief. The introduction of a new capital allowances pool for business assets which do not currently qualify for capital allowances (excluding land and dwellings) could ease some of this pressure. The OTS do point out that this extension of capital allowances would be costly, therefore, we don’t think that this is likely to be implemented.
- An accounts-based capital allowances approach would base capital allowance on how assets are categorised in the statutory accounts. This would remove the need to re-categorise capital expenditure for tax purposes as this analysis would be aligned and relief would be available at rates determined by the government. The OTS considers several potential approaches to this, for example, assets disclosed as plant & machinery in the accounts would apply a writing down rate of 10%.
Overall, the OTS felt that, although it would be feasible to abolish capital allowances, this would not be straightforward and the complexities of the change would outweigh the benefits. However, on the back of the OTS review, we anticipate that we may see some changes to the capital allowances regime in the near future.
Should you any questions about capital allowances please do not hesitate to contact me.