UK and International Tax news

Consultation On Reform Of Capital Allowances Regime

Friday 27th May 2022

The Treasury has launched a consultation on the reform of the UK’s capital allowances regime.

As set out in the Tax Plan announced by the Chancellor in his Spring Statement, the government is considering options ahead of the Budget later this year. The government has identified the following areas of interest and has requested responses thereto:

  • Investment decisions – evidence 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 – views on how the super-deduction has affected the investment decisions of businesses
  • The current system of capital allowances – views on how far capital allowances rates influences decisions by multinationals on which territory to invest in, together with views 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.

The Chancellor set out various options in the Spring Statement including:

  • increasing the permanent level of the Annual Investment Allowance from £200,000 to perhaps £500,000
  • increasing the rates of Writing Down Allowances for main and special rate pools from 18% and 6% respectively to perhaps 20% and 8%
  • introducing general First-Year Allowances for qualifying expenditure on plant and machinery at perhaps 40% (main rate) and 13% (special rate)
  • introducing an additional FYA, for example at 20%
  • introducing permanent full expensing

Whilst some have called for full expensing to be introduced following the end of the super-deduction in December 2023, this could cost over £11bn in a single year. 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).

The government also welcomes views on how best to target its approach if less funding is available.  The options will have different outcomes for different types of business, depending on whether a business is incorporated or unincorporated, profit or loss making, and the extent to which it values an immediate cash benefit.  In addition, the options may impact businesses using debt over equity finance.

If you would like further information on the consultation, please contact Keith Rushen on 0207 486 2378.

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