NEWS

OTS REVIEW - CAPITAL ALLOWANCES

Early on Friday morning (15 June 2018), the Office of Tax Simplification (OTS) published their report into Capital Allowances (CA) and whether this could be replaced with accounting depreciation.

 

I was pleased to meet the OTS back in November 2017 to discuss this potentially significant change.  However, rather selfishly, I was even happier with the broad conclusion that a change “would not be worth the upheaval” and “would come with a big price tag”.

 

I really could say nothing more and you may wish to read no further, but the OTS raised a couple of alternative simplification proposals, so I have commented on these below. 

 

We may see them introduced or discussed further down the line, although I imagine that this would only happen be post Brexit.

 

A link to the complete 80+ page report is also included. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/716304/Accounting_depreciation_or_capital_allowances_web.pdf

 

Annual Investment Allowance (AIA) and First Year Allowances (FYA)

 

  • The AIA currently allows immediate tax relief for qualifying expenditure (e.g. excluding cars) upto £200,000 each year.

  • The availability of the AIA already means that no further CA calculations are required for circa 80% of company taxpayers, with only about 30,000 businesses spending more than the AIA limit.

  • The OTS consider the equivalent to the AIA should be retained in any future system.

  • The OTS also consider that widening the AIA to all assets, including buildings and cars but excluding land and dwellings, would provide an even greater simplification.

    • HMRC estimate this could cost the Exchequer upto £2.5bn more than the current AIA regime.

    • HMRC then note this could be offset by reducing the £200,000 limit, or by continuing to exclude certain assets e.g. cars.

  • The OTS also note that both Enhanced Capital Allowances (ECA) and Research and Development Allowances (RDA) are important for wider government objectives.

  • HMRC modelled a depreciation based approach, maintaining the existing AIA, ECA and RDA regimes, would save taxpayers £7bn in tax.

 

Full Scope CA’s

 

  • The OTS highlighted the cliff edge between qualifying expenditure and non-qualifying expenditure e.g. buildings.

  • The OTS suggested a new CA pool could be created for new ‘building’ assets, still excluding land and dwellings.

    • HMRC estimated that a 2% flat rate would be cost neutral, only if the main 18% rate was reduced to 16% and the special 8% rate was reduced to 7%.

  • Having lost IBA in 2011, I cannot see HMRC wishing to introduce this any time soon, although it would be a simplification for many businesses.

 

Accounts Based CA’s

 

  • If accounts depreciation is both too costly and would require adjustments anyway, it would not deliver the aimed for simplification.

  • The final OTS alternative would be to link asset lives more closely to a CA pool; e.g. an asset with a life of less than 5 years would be allocated to a CA pool with a 25% writing down allowance, and so on.

    • This would allow HMRC more control as they would be setting the appropriate CA rate.

    • This would extend the scope of CA, so would potentially still lead to an increased cost to the Exchequer.

 

Contact

 

If you have any questions about the OTS Review or any other aspect of property-related capital allowances, please do not hesitate to contact me via ian@imhadvisory.com or call 07970 720728. 

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