Potential reform of capital allowances: Policy Paper invites views

At the Spring Statement, the government published a Tax Plan which indicated that one area that it was keen to review is the UK’s capital allowances regime. The government has now published a Policy Paper, “Potential Reforms to UK’s Capital Allowance Regime”, inviting views from the public. The government is seeking responses at this stage to ensure there is adequate time to fully assess stakeholder views to inform any Budget announcements ahead of the end of the super-deduction in April 2023.

The Tax Plan

The Tax Plan suggested a number of areas where changes might be considered as part of any reform of capital allowances.

Annual Investment Allowance (AIA): The AIA allows most businesses to deduct the full amount of qualifying expenditure up to a set level. 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. Reform might increase the permanent level of the AIA from £200,000 to, for example, £500,000.

Writing Down Allowances (WDAs): WDAs are calculated as a percentage of the pool balance. Most expenditure is added to either the main pool or the special rate pool, where WDAs are available at 18% and 6% respectively. Reform might increase the rates of WDAs from 18% and 6% to, for example, 20% and 8%.

First-Year Allowances (FYAs): FYAs allow businesses to deduct a percentage (usually 100%) of qualifying expenditure in the year the expenditure is incurred on qualifying expenditure on specific new plant and machinery or for specific regions (such as Freeports). However, FYAs are also used to provide general incentives to invest in plant and machinery. For example, the current 130% super-deduction and the 50% special rate allowance are both FYAs. An option is 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.

Additional FYA: An Additional FYA would allow both a percentage of qualifying expenditure to be claimed in the year the expenditure is incurred (20% for example) 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. 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.

Full Expensing: Full expensing would be the costliest measure to implement, as it would allow all qualifying expenditure to be written off in the year the expenditure is incurred and would be uncapped. The Tax Plan notes that no other country in the G7 has implemented this on a permanent basis, and, as with the Additional FYA option, risks incentivising inefficient, low-return debt-financed investment. Given the significant tax benefit to taxpayers, the design of this measure would need to be considered very carefully to prevent abuse. An option would be to introduce full expensing of main rate plant and machinery and a 50% FYA for special rate plant and machinery.

Policy Paper

The government has now published a further Policy Paper, inviting comments on both the nature of the incentives provided by capital allowances and possible reforms to the capital allowances system. In particular, the Paper identifies a number of areas of interest where the government is keen to hear from stakeholders.

Investment decisions: The government would welcome evidence from stakeholders on how firms 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.

The super-deduction: The government 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.

The current system of capital allowances: The Spring Statement acknowledged that the generosity of permanent capital allowances available in the UK compares unfavourably to some international peers and wants to know what more the capital allowances regime can do to support business investment. Accordingly, the government is requesting comments on how far capital allowances rates influences decisions by multinationals on which territory to invest in. The government is also looking for feedback on levels of awareness of the current system and how simple it is to understand and operate, and whether it provides adequate support for business investment.

Spring Statement options: Finally, the government is looking for feedback on the various options set out for possible reform in the Tax Plan. The Policy Paper notes that if full expensing were to be introduced following the super-deduction this could cost over £11bn per annum. If sufficient funding were to be available, the government is interested in stakeholder views about whether this would be best spent on full expensing or better targeted through other options (including non-tax options). Similarly, the government would welcome views on how best to target funding if £11bn is not available.

Comments

Responses (via an online link included in the Policy Paper) are requested by Friday 1 July.