The government is reforming UK’s capital allowances system

08-06-2022

By Mak Okay-Ikenegbu

The Chancellor of the Exchequer, The RT Hon Rishi Sunak MP on 23 March 2022 delivered his Spring Statement 2022 speech at the house of commons. The Chancellor mentioned that a number of reforms to better support business investment in the UK is being considered. This is against the backdrop of the fact that when compared with other countries, the tax treatment allowable in the UK for capital assets such as those qualifying as plant and machinery, is much less generous that the OECD average.

Further to this, Her Majesty’s Treasury has released on 9 May 2022, a policy paper on those potential reforms to the UK’s capital allowances regime. The publication is aimed at kickstarting a conversation with businesses about how to reform the UK’s capital allowances system. Ahead of the end of the 130% super-deduction tax relief ending in April 2023, the government is keen to receive and assess consultation responses on potential reforms, in time for the Budget announcement later this year. Businesses and stakeholders can participate in that conversation, by responding to Her Majesty’s Treasury’s “Potential Reforms to UK’s Capital Allowance Regime” call for responses by 5pm on Friday 1 July.

The focus is on certain areas of interest such as:

  • Investment decisions – evidence on the impact of capital allowances on capital investment decisions.
  • The super-deduction – evidence on the impact of the super-deduction on investment decision making.
  • Current system of capital allowances – views on the current system of capital allowances.
  • Spring Statement 2022 – views on some of the options for reforming the current system of capital allowances as set out in the Spring Statement 2022.

Some of the reforms to the current system of capital allowances which the government is considering include a very ambitious 100% capital expenditure deduction from taxable profit, otherwise known as full expensing.

Full expensing

In modern British history, this is considered very generous and simplified. This could potentially mean that when a business spends a £10m in acquiring any piece of plant or apparatus for carrying on their business activity for example, they may be entitled to deduct the £10m immediately in full from their taxable profit in that year. Assuming a 25% Corporation Tax rate, the immediate tax cash saving benefit would equate to £2.5m. This is far more generous than the immediate tax benefit expected in the current tax relief landscape (excluding the temporary super-deduction).

Other changes being considered

Below are other changes the government is also considering which may not be as generous and have the potential to further heighten the complexity of the capital allowances scheme.

  • Annual Investment Allowance (AIA): The government is considering increasing the annual investment allowances permanent limit from £200,000 to £500,000. This is currently set at £1m temporarily until 31 March 2023.
  • Writing Down Allowances (WDAs): The main and special deduction rates of writing down allowances (WDA) which is more or less the default avenue of getting tax relief on plant and machinery allowances, could also be increased from 18% and 6% respectively, to 20% and 8%.
  • First-Year Allowances (FYAs): The government is also considering a new first-year allowances scheme that will see for example 40% and 13% of immediate deduction available on main and special rate pool qualifying assets respectively. The balance of say 60% and 87% will then be available in the default way through the WDA.
  • Additional FYA: There is yet another variation of the first-year allowances which the government is also considering. This will be in addition to claiming the default WDA. For instance, in addition to eligibility to claim WDA on £1m of qualifying capital expenditure, an additional 20% of allowances, that is £200,000 may be claimable in the first year. That means that an overall allowances of £1.2m or £300,000 of tax cash saving benefit (assuming 25% Corporation Tax rate) will be claimable, albeit over a number of years. This has some similarities to the super-deduction scheme; however, the 130% super-deduction is designed to be claimable in full immediately.

Summary

It is not surprising to see that the government is considering a number of reforms to make the capital expenditure tax relief landscape more lucrative for businesses. This is in line with the government’s commitment to boost the economy through tax reforms that incentivise business investment.

Ahead of the Budget later this year and the end of the 130% super-deduction tax relief, it is important for businesses and stakeholders to participate in the government’s review aimed at new reforms to the capital allowances regime. The reforms are expected to better support business investment. Businesses can respond by responding to Her Majesty’s Treasury’s “Potential Reforms to UK’s Capital Allowance Regime” call for responses.

How we can help

Our capital allowances team of qualified specialists with diverse experience and multidisciplinary construction and financial skills, leverage on their expertise to maximise cash saving benefits for businesses who incur capital expenditure.

We provide a whole development lifecycle capital allowances advice from planning to design, construction, occupation and subsequent disposal or sale. This includes property sale and purchase transaction advise to support either the vendor to retain their capital allowances, or for the buyer to benefit from capital allowances on the purchase price paid.

What are the next steps?

Capital allowances can be claimed not only by companies, but also partnerships, individuals and overseas investors which carry out qualifying business activities such as a trade, property business, furnished holiday let, etc.

Are you planning to, or have you already incurred any commercial building or large-scale industrial and engineering plant related capital expenditure which may fall under any of the following categories?

New construction | Refurbishment works | Fit out works | Buying buildings

Please let us know as we can help you unlock and maximise cash tax savings and improve your business cash flow.

Contact

Mak Okay-Ikenegbu
Head of Capital Allowances
e mokay-ikenegbu@leyton.com
t +44 20391 71494

Mak Okay-Ikenegbu

Head of Capital Allowances