2018 could see significant tinkering to the Capital Allowances legislation. HMRC consulted on revamping the Capital Allowances system last November. We look at what is being proposed and the potential impacts.
What is being proposed is a move away from the current “pooling” Capital Allowance system to an asset-based accounts depreciation approach. Now you can be forgiven for having deja vu, as this suggestion has been raised and dismissed on several occasions in the past and so it does raise the question as to why we are here again.
The perceived benefit is that a doubling up of the accounting treatment of assets to match that of the tax treatment, will simplify the tax submission process for businesses.
This however, will not remove the need for businesses to allocate costs of individual assets to match the appropriate class of depreciation, which is a common gripe of the existing system. That being said, the introduction of Integral Features did provide a more prescriptive list of asset heads which the vast majority of expenditure already falls under. Equally, the Annual Investment Allowance currently provides £200,000 of tax relief in each tax year and so will cover the many smaller businesses typical level of annual capital expenditure.
Such a move would appear to have the usual winners and losers scenario, with the large infrastructure businesses with extensive asset inventories, the businesses to benefit the most, with added administrative burden for the numerous smaller businesses who currently don’t have to do segregated depreciation. It would also allow tax relief to be claimed against currently non-qualifying expenditure, something which has not been seen since the abolition of Industrial Building Allowances (IBAs) back in 2011, when the entire property received some form of tax relief. In a time when the Exchequers coffers are being squeezed, proposing an alternate system which will be more generous in giving tax relief seems an unlikely outcome of the review.
The current Capital Allowance system provides HMRC with a very flexible approach which it has used regularly to influence the investment into certain areas. Recent examples include the Business Premise Renovation Allowance for investment in bringing empty buildings back into use and Enhanced Capital Allowances for investment in green technologies. It is difficult to see how a deprecation-based approach would give the Government that same degree of flexibility.
The argument put forward that going into a low corporation tax environment reduces the need to have Capital Allowances does not recognise that it is the only way of incentivising investment in property. In a post Brexit world, Capital Allowances can provide significant influence for businesses to invest and to change direction now would cause major disruption to businesses over what would be an inevitably prolonged transition period.
Veritas Advisory will continue to engage with HMRC and will provide updates in future newsletters or on our website www.veritasadvisory.co.uk