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Capital Allowances Elections OTS Review

With over 1,190 tax reliefs available, the Office of Tax Simplification (OTS) has the unenviable but important task of finding ways to make the UK tax system easier for taxpayers and to reduce complexity.

Following its announcement in February 2020, the OTS has now concluded its latest review into capital allowances elections and made the following recommendations: -

  1. The government should consider the benefits and costs in introducing a pooling mechanism for short life assets acquired in a particular year.

  2. The government should review the current requirements to provide information on all assets being treated as short life assets, to identify whether they could be simplified or reduced.

  3. HM Revenue & Customs (‘HMRC’) should provide a template for businesses to use when making a capital allowances election to agree the value of fixtures.

  4. The government should, where possible, ensure that time limits in which to make a claim or election should refer to tax year or accounting period end.

  5. The government and HMRC should ensure consistency in time limits for amending claims or elections, so that they are the same whether it is made within or outside a return.

Short Life Assets

A lot of businesses are put off by making short life asset (SLA) claims because of the additional administration burden in identifying and tracking SLA assets so anything that the government can do to simplify this should be welcomed.

Many SME businesses do not consider SLA treatment for qualifying plant or machinery (P&M) because the current Annual Investment Allowance (AIA) allows them to write-off up to £1 million in Year 1. However, with the AIA set to reduce to £200k from 1 January 2021, SLA treatment is likely to come back on people’s agenda.

The key benefit of SLA treatment is that it lets the taxpayer write off the cost of an asset over its actual life and you can learn more about SLAs in our article here.

Fixtures Elections

Despite fixtures elections being around for almost 25 years there can still be confusion on format and detail so the inclusion of (3) above is a welcome development; however, one still has to question why OTS is not challenging HMRC to do more.

One major step forward would be for HMRC to join forces with the land registry to co-ordinate relevant tax information by property and title reference. This could include not only capital allowances information but SDLT and VAT (e.g. options to tax).

This would help HMRC enforce compliance and make compliance more efficient and accurate for taxpayers when acquiring properties. A fixtures election is just one type of document that duplicates valuable information (e.g. title references, purchase prices, property names/addresses, tax districts etc.) found elsewhere and although these elections must be submitted to HMRC formally there is no central collation for administration or practical use.

Structures and Building Allowances

Although not part of the initial consultation, the OTS acknowledged the feedback it received on the administration difficulties of Structures and Building Allowances (SBAs). Specifically, the need to identify first non-residential use for lots of small projects across various sites, leading to multiple first year calculations, allowances statements and documentary evidence files.

As the SBA is still a relatively new regime, and given the policy challenges that would be needed to resolve some of the concerns, the OTS concluded that it would be premature to make recommendations in this area.

Given the amount of businesses that are putting off SBA claims, particularly for small projects, because of the hassle V benefit, we hope that government policymakers and HM Revenue & Customs take note - as time goes on, pressure for simplification will grow.

Disclaiming Capital Allowances

Almost every consultation on capital allowances includes a question on the ability of taxpayers to disclaim certain capital allowances (e.g. because of tax capacity, losses etc.).

It is recognised as an extremely valuable strength of the UK tax system and the recognition by the OTS of this is welcomed - "the OTS recognises that the ability to disclaim capital allowances is seen by the business community as necessary and desirable". As a result, no changes were proposed.

If you have any questions on capital allowances or the OTS review, please do not hesitate to contact us.

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