Accounting depreciation or capital allowances?

The recent report produced by the Office of Tax Simplification (“OTS”) explores the possibility of replacing capital allowances with accounts depreciation, as a way of giving tax relief on tangible fixed assets.

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The OTS has acknowledged that whilst this could work, if being designed from scratch, the potential benefits of moving from an existing system would be far outweighed by the upheaval involved. Such an extension of the scope of relief would come with a big price tag, require lengthy transition periods, and involve all businesses in a process change...

Background

The OTS, as an independent adviser to HM Treasury, was responsible for providing the Government with independent advice on whether they could simplify the UK tax system and reduce the administrative burden on businesses and individual taxpayers.

Following up on one of the main recommendations in the OTS’s July 2017 review of the corporation tax computation, capital allowances (“CAs”) was highlighted as being a potential area for simplification, as it has often been considered overly complex and at times unfair between different businesses.

Capital allowances are an integral part of the UK’s mechanism for taxing businesses and it provides tax relief for expenditure incurred on tangible fixed assets used in a business.

The OTS carried out a review to ascertain whether this complexity could be reduced using accounts depreciation, to provide relief for capital expenditure instead of CAs, and whether this would simplify the preparation of tax returns for incorporated and unincorporated business.

Findings

Whilst the OTS have included some recommendations on the simplification of the CAs system, such as the widening of the scope of the Annual Investment Allowance (“AIA”), and the scope for CAs generally, they have acknowledged that the existing CAs regime should be retained; the main reasons being:

  • The number of taxpayers who claim capital allowances over and above the Annual Investment Allowance (a 100% first year allowance for expenditure on plant and machinery, with a current limit of £200k per annum) is relatively small (approx. 30,000). As such, the complex capital allowances rules do not impact smaller business, who would be unable to pay for professional advisers such as CBRE, to help them establish entitlement to capital allowances, and claim the optimum amount of tax relief available
  • The negative cost impact to the Treasury of a full depreciation based approach would be significant
  • A full depreciation approach would remove the Government’s ability to influence investment decision. For example - Enhanced Capital Allowances (ECAs), which the Government introduced to encourage taxpayers to purchase ‘green and energy efficient’ technologies, or Research and Development Allowances (RDAs) which encourages innovation
  • The direct control of the tax system would be given up by HM Treasury
  • There is a view that taxpayer’s interpretation of accounting rules might lead to manipulation of accounting policies by some taxpayers, which would not create a level playing field. This is in contrast to the capital allowances rates which are set out in tax legislation

CBRE comment

CBRE share the view that the existing capital allowances regime should be retained, as moving away from a well-established mechanism, to a form of hybrid depreciation, may simply result in an equally complex system, with a significantly difficult period of transition.

Whilst we would welcome a review to widen the scope of the Annual Investment Allowance or the capital allowances regime in general, we would be keen to understand in greater detail the implications of such before making comment. If such changes are to have a cost neutral impact to the treasury, then it is likely that the current AIA threshold or rates of writing down allowances for plant and machinery will need to be reviewed to make this effective. The result being inevitably that some taxpayers would benefit and some would lose out. The consequences of any proposed changes would need to be carefully considered by all stakeholders.

Given the complex nature of capital allowances, we would recommend that you seek specialist advice when looking to acquire, develop or fit-out/refurbish a commercial building. Waiting until after the event is often the least tax effective way of optimising your position.

Please feel free to contact a member of our specialist team, who will be happy to assist.

Warren Francis
Director in the Capital Allowances team within Building Consultancy
[email protected] 
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