Updated: Jul 5, 2020
The latest review by the Office of Tax Simplification (OTS) into the UK capital allowances system has concluded replacement with accounts depreciation would not be worthwhile at this time. Instead, the report makes some new recommendations for simplification with the long-term objective of achieving full scope capital allowances (i.e. remove the cliff edge of non-qualifying building expenditure) over time.
Furasta Consulting met with the OTS to discuss the consultation in detail and we also had the opportunity to demonstrate and get feedback on FURASTAHUB – a web platform that aligns one of the medium term recommendations for a list of all qualifying assets for capital allowances purposes with specific guidance.
An unfettered switch to a wholly accounts based system could cost the Exchequer £7bn annually (excluding oil and gas) and there would be a significant change (good and bad) to the tax base for many of our biggest businesses. The details, consequences and policy objectives for which are not clear.
It could of course be done in a tax neutral way but this would require a fresh set of rules on top of a lengthy transition period and process changes by almost every UK business.
For example, HMRC’s modelling of the impact of a depreciation based approach indicates that a switch to such an approach without an Annual Investment Allowance (AIA) equivalent, would increase the tax paid by small and micro companies by about £800m each year, deferring about 30% of the value of their tax relief for capital expenditure.
If full scope capital allowances cannot be achieved, the report recommends revisiting a more radical reform that leverages information used in the accounts but not based on accounts depreciation.
Widening the Annual Investment Allowances
As you would expect there is a lot of analysis data and one of the more interesting statistics
based on CT600 and self-assessment return data is the fact that 96% (c. 1.2 million) of business claims are for under £200,000 (the current AIA limit) and these account for only 10%, in terms of value, of all claims made (£116bn) in a typical year.
The AIA offers a timing advantage only, as expenditure on buildings and other assets (e.g. cars) are specifically excluded. A widened AIA could offer both an absolute tax incentive and simplification (potentially up to 96% of businesses).
The current annual cost to the Exchequer of AIA is £2.5bn, and were it extended (e.g. for non-qualifying buildings) without controls, would cost about the same again (i.e. up to £5bn). To be affordable there would likely need to be a trade-off elsewhere to afford (e.g. reduction in AIA, reduced writing down rates or removal for larger companies).
Widening Capital Allowances Generally
The most significant recommendation is for a widening of capital allowances more generally to avoid the ‘cliff edge’ that arises between investments in qualifying and non-qualifying assets. This is not new and goes to the heart of why capital allowances computations can be burdensome and the challenge of course is cost.
HMRC estimate that a 2% flat rate allowance for assets which do not at present qualify for CAs, would be cost neutral if the main 18% rate was reduced to 16% and the special 8% rate was reduced to 7%. In the longer term, as the value of newly qualifying assets builds up, a greater reduction in other rates may be necessary to achieve neutrality.
The winners and losers in such an approach would be the 30,000 businesses which regularly spend more than the AIA limit.
Intermediate Administrative Simplification
One point that has been made consistently by the OTS and others is the lack of a clearly stated policy objective when it comes to specific tax relief for tangible fixed assets, the UK currently ranks 98/100 on this specific area according to the tax attractiveness index. One of the trade-offs for lower corporation tax rates.
The report also raised the issue of capital/revenue distinction which again is something that has been raised before, along with the small 1k capital exemption and various minor simplifications highlighted in previous reviews.
A list of qualifying assets is another aspect that would be welcomed by many and if you are interested we would encourage you to get in touch to learn more about our web based platform which contains just that for multiple project and property types.
To what extent the government will take-up any of the OTS’s recommendations remain to be seen and we await its response with interest. For further details please do not hesitate to get in touch here.