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Potential reforms to UK’s capital allowance regime

Date: August 23, 2022

The Super Deduction introduced a generous and unprecedented 130% first-year allowance on qualifying plant and machinery. This relief is due to end in March 2023, and the government are now considering reforms to the UK’s capital allowances regime, intending to “foster a new culture of enterprise and growth in the UK”.

As part of their analysis in the Spring Statement 2022, the government has recognized that, once the Super Deduction ends, the UK’s capital allowances regime is less generous than the average of the countries that form the OECD (Organization for Economic Cooperation and Development).

The purpose of any potential reform would be to offer a more generous tax relief regime for capital investment, encourage growth and improve our global standing in capital investment relief to become more competitive.

The government has invited stakeholders to give feedback on the current capital allowances regime and input on a few suggestions of what the potential reforms might look like.

Below are the suggestions made by HM Treasury:

• Increase the permanent level of the Annual Investment Allowance (AIA), for example, to £500,000.
• Increasing Writing Down Allowances for main and special rate assets from their current levels of 18% and 6% to 20% and 8%.
• Introduce a First Year Allowance (FYA) for main and special rate assets where firms can deduct, for example, 40% and 13% in the first year, with the remaining expenditure written down at standard Writing Down Allowances.
• Introduce an Additional First Year Allowance, to bring the overall amount that can be claimed to greater than 100% of the initial cost.
• Introduce full expensing, to allow businesses to write off the costs of qualifying investment in one go.

Catax responds:

We at Catax welcome the recognition by HM Treasury to reform the capital allowances regime to become more generous and globally competitive. A generous reform would offer our clients a better return on their capital investment, and we would agree with the government’s outlook that these reforms will promote a new culture of growth.

Of the options presented above in the Spring Statement, we believe the best incentive to encourage growth is relief that offers taxpayers an upfront investment return. The increase to the permanent level of the AIA is an excellent example; the current £1 million AIA has allowed most of our clients to receive a quick cash injection into their business. This creates the opportunity to reinvest funds or make an investment project more affordable.

Comparing this to when taxpayers are restricted to writing down allowances, the relief and return on the investment are considerably slower.

It is this reason why we believe the following options presented in the spring statement would be best suited for the reforms;

• Increase the permanent level of the Annual Investment Allowance (AIA)
• Introduce a First Year Allowance (FYA) for main and special rate assets

We have also identified other areas for HM Treasury to consider as part of the reforms;

• Income taxpayers have been excluded from current tax relief incentives, including the Super Deduction. Excluding income taxpayers limits the reach of any culture of growth created, particularly in industries where partnerships are prevalent such as in the medical and dentistry profession. We have recommended that any new relief is made available to income taxpayers to ensure the incentive to invest has the broadest possible reach.
• Loss-making entities are unable to benefit from current tax relief incentives until they are profitable. We recommend introducing an ability for loss-making companies to surrender allowances for a repayable tax credit, similar to that provided under the SME R&D tax relief regime, to unlock reinvestment potential in loss-making entities. Post-Brexit this would be an opportunity to put UK businesses in the best possible position to succeed.
• Focusing more tax relief incentives on Special Rate Pool expenditure. Special Rate Pool Expenditure includes heating, electrics and plumbing and is more prevalent in a significant large-scale investment project (up to 70% of qualifying costs). Therefore, we have recommended more targeted relief on this expenditure to encourage more substantial investments.
• Removal of the 2-year s198 election deadline window. Doing so would ensure investors in existing properties have more time to engage with a specialist tax advisor to ensure tax relief on these investments is not lost. Knowing there is potential for relief to be still available when acquiring existing assets would encourage property transactions leading to unused or run-down buildings being brought up to current standards and boosting local communities.

Catax was grateful for the opportunity to be part of the conversation and feedback directly to HM Treasury with the above. We are eager and optimistic about the Autumn budget.

Even with a change in Prime Minister in the coming weeks, we hope the potential reform to capital allowances is still high on the agenda for HM Treasury to create growth and move the economy away from the recent downturn.

If you would like further reading, please see the full spring statement here.

Or the full reform details can be found here.