Big Changes Coming to the Capital Allowances Regime? – Our Expert Take
YesTax was pleased hear at the spring statement that the government is working on changes to the UK’s capital allowance regime rules by bringing the amount of relief available for capital spend in line with other OECD countries, to further encourage investment in the UK. The future of capital allowances post April 2023 has certainly been a question on the minds of many tax advisers, when super deductions end and the Annual Investment Allowance is scheduled to roll back to £200k per year.
The government set out a number of proposed changes that it may pursue in the Autumn Budget and beyond, and in this article, we provide our commentary and insight on each of the potential changes to the capital allowances regime.
1. Increase the permanent level of the Annual Investment Allowance, for example to £500,000. At its peak, this could cost around £1 billion in a single year. Previously an Annual Investment Allowance threshold of £1 million has covered around 25% of Annual Investment Allowance eligible plant and machinery expenditure.
The Annual Investment Allowance (AIA) has been an excellent relief for helping small and medium businesses invest, allowing them to receive all the plant & machinery allowances they are due in the first year. For many budding or growing businesses the enhanced relief can mean the difference between a capital project being commercial or not.
Historically the AIA has fluctuated, although it’s been at its current level of £1m since January 2019. £1m certainly represents a sizeable amount of capital expansion for a range of businesses and we’d like to see it stay at this level. However, £500k would certainly still be a great outcome.
2. Increasing Writing Down Allowances for main and special rate assets from their current levels of 18% and 6% to 20% and 8%. At its peak, this could cost £2 billion in a single year. This would particularly support those investing above the permanent Annual Investment Allowance level.
The proposal is correct - this primarily affects those who cannot benefit from AIA, but an AIA limit of £500k would see many more companies using these new writing down allowances. This would certainly be a positive change, as due to the reducing balance nature of writing down allowances (“WDAs”), it takes a long time for the benefits to arise.
For context, with the current main pool and special rate WDAs, it would take 9 and 27 years respectively to obtain deductions equal to 80% of the value of the asset. At the proposed 20% and 8% rates it would take 8 and 20 years respectively to obtain 80% of the value.
While it can be said that 8 years is still a long time for assets such as computer equipment (which would likely be out of date in 4 years) there is additional relief available for such assets in the form of the Short Life Assets (SLAs) rules. However, claiming and tracking SLAs can be an onerous exercise.
An interesting side effect of increasing WDA rates is that historical reviews, which would be out of time to receive any enhanced relief like AIA, become more attractive. A business can still claim allowances for existing assets, no matter how old, so long as they are still used in the trade and were not claimed previously.
3. Introduce a First Year Allowance 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. At its peak, First Year Allowances of 40% and 13% could cost £3 billion in a single year. This would particularly support those investing above the permanent Annual Investment Allowance level. However, it may add a layer of complexity to the UK’s capital allowances regime.
This is an evolution of the deduction currently available through the special rate super deduction, whereby 50% of the cost of the asset is deductible in the first year, with the remainder arising over time. In principle this would be great in making that initial outlay of expenditure less daunting, while still representing value that the assets will offer over time.
This proposal feels like a mid-point between full first year allowances such as the AIA, and over time reliefs like the basic writing down allowances. The complexity point is perhaps not a major concern as typically the difficult part of a capital allowances claim is separating expenditure between capital allowances pools in the first place, rather than the application of rates.
4. Introduce an Additional First Year Allowance, to bring the overall amount that can be claimed to greater than 100% of the initial cost. An additional capital allowance of 20% in the first year, on top of standard Writing Down Allowances on 100% of the initial cost across the first and subsequent years. This would spread relief over time, while giving relief on over 100% of the initial capital cost. At its peak, an additional allowance of 20% could cost over £4 billion in a single year. It may add a layer of complexity to the UK’s capital allowances regime.
There are only a few examples historically of reliefs that offer more deductions than the total cost of the asset. Currently reliefs include:
- Land Remediation Relief (LRR) offers 150% deductions for expenditure on dealing with hazardous contaminants and derelict land
- The main pool super deduction offering 130% first year. This makes savings obtained for main pool spend at the current tax rate equal to the equivalent AIA after the tax rate increases (19% CT tax rate @ 130% = 25% CT tax rate @ 100%). Therefore, tax payers are not incentivised to wait for the tax rate increase before undertaking capital works.
Clearly these examples have specific purposes - a similar relief applied to the capital allowances landscape more broadly would be generous indeed, and for our money seems one of the less likely proposals.
5. Introduce full expensing, to allow businesses to write off the costs of qualifying investment in one go. No other country in the G7 has implemented this on a permanent basis. Full expensing of plant and machinery could cost significantly more than the above options. At its peak, this could cost over £11 billion in a single year.
As set out above, this would be a fairly radical departure from the current system and deviate from of one of the purposes of the capital allowances legislation; to represent the value that capital assets offer to a business over time. It’s an interesting proposal though, and certainly leads on to a lot of questions on how it might be administered.
6. These changes relate to capital expenditure on general plant and machinery. However, the government could also consider changes to other allowances, such as the Structures and Buildings Allowance, or new reliefs targeted at specific investments (such as the current Enhanced Capital Allowances within designated Freeport areas).
Structures & Buildings Allowances (SBAs), whilst moderately useful, are somewhat underwhelming in their value, especially as any savings obtained can be clawed back through the CGT calculation (unlike other capital allowances). We also would expect a new relief targeted at environmentally friendly assets to be in the works, since the first-year allowances for such expenditure were abolished in 2020.
We very much expect a small subset of the above changes to be implemented in some form in the Autumn budget, but which ever proposals are implemented, it certainly points to capital allowances continuing to be a lucrative relief for capital investment.
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