In July 2017 the Office of Tax Simplification made several recommendations for the simplification of Capital Allowances. That September the Chancellor asked the Office of Tax Simplification to explore the potential for replacing Capital Allowances with a regime based on accounts depreciation.
Why did the Office of Tax Simplification (OTS) investigate changing the Capital Allowances legislation, what did they take into account to apply this to a new system and analyse this from a business point of view.
In 2015/16 1.2million businesses claimed Capital Allowances. The Exchequer forecasted in 2017/18 that if there was no relief for capital expenditure by way of Capital Allowances they would recover an additional a £21.5bn in tax.
Capital Allowances represents the 6thlargest relief overall and the only other business relief that is higher is the employer’s national insurance contributions.
However Capital Allowances is widely acknowledged as an over complicated system which has evolved over the years to its current state and any changes to the system would impact businesses differently by industry and size.
The consensus of all respondents to the consultation was any change away from Capital Allowances would not be straightforward.
The purpose of the report was to consider if depreciation was a feasible alternative approach, if a practical transition could be achieved and the consequences of such a change.
A concern of aligning Capital Allowances to depreciation was that the government could lose a degree of control such as not being able to adjust the writing down levels should the Government wish to encourage investment.
Examples of accelerated allowances that could be lost include the 100% energy efficient Enhanced Capital Allowances for green technologies plus research and development allowances.
Significant difficulties would also arise during any transition period with certain industries losing out.
On the flip side the depreciation system considered was to categorise assets for accounts into buildings, plant and machinery, fixtures and fittings, meaning that the process has only to be done once, reducing the burden to the taxpayer and simplifying the process.
Additionally, under the current regime a taxpayer is unable to claim on items where they receive a grant payment but under depreciation the amount is presented separately and not deducted from the asset. Similarly, capitalised interest is seen as too remote for Capital Allowances but can form part of the total cost in the assets.