The Government released a publication this week which aims to kickstart a conversation with businesses about how to reform the UK’s capital allowance regime.
The publication sets out how firms can work with the government on the capital allowance regime to help foster a new culture of enterprise and growth in the UK with the most radical option in the publication being to introduce full expensing of main rate plant and machinery.
Here we summarise the key points from the publication:
Annual Investment Allowance (AIA)
The AIA allows most businesses to deduct the full amount of qualifying expenditure up to a set level to arrive at taxable profits. It can be claimed on most plant and machinery expenditure but excludes expenditure on cars.
The permanent level of the AIA is set at £200,000 per year, which has been temporarily increased to £1m per year between 1 January 2019 and 31 March 2023.
An option is to increase the permanent level of the AIA from £200,000 to, for example, £500,000.
Writing Down Allowances (WDAs)
Simply, WDAs spread tax relief over multiple years by allowing businesses to deduct a percentage annually from a relevant pool of qualifying expenditure to arrive at taxable profits.
WDAs are calculated as a percentage of the pool balance, with unrelieved expenditure carried forward to the next period. There are 2 ‘pools’ – main pool or the special rate pool, where WDAs are available at 18% and 6% respectively.
An option is to increase the rates of WDAs from 18% and 6% to, for example, 20% and 8%.
First-Year Allowances (FYAs)
FYAs allow businesses to deduct a percentage of qualifying expenditure in the year the expenditure is incurred. FYAs are uncapped and don’t count towards the AIA limit. Most FYAs provide 100% capital allowances for qualifying expenditure on specific new plant and machinery or for specific regions but FYAs have also been used to provide general incentives to invest in plant and machinery. For example, the 130% super-deduction and the 50% special rate allowance are both FYAs.
An option is to introduce general FYAs for qualifying expenditure on plant and machinery, for example a 40% FYA for expenditure on main rate and a 13% FYA for expenditure on special rate plant and machinery.
Additional FYA
The publication also sets out a proposal to introduce an additional FYA which would allow both a percentage of qualifying expenditure to be claimed in the year the expenditure is incurred and 100% of that expenditure would still be available to be pooled with WDAs claimed in the normal way.
This would provide relief above the amount of qualifying expenditure spread over time. Where an AIA claim is made on an amount of expenditure, an Additional FYA claim could not be made on the same expenditure. As an Additional FYA would relieve expenditure above the asset acquisition cost, the design of this measure would need to be considered very carefully to prevent abuse.
An option is to introduce an Additional FYA, for example at 20%.
Full Expensing
This is the most surprising option in the publication and the one which would be the costliest as it would allow expenditure to be written off when it was incurred and would be uncapped. It could cost up to £11bn a year to operate.
No other country in the G7 has implemented this on a permanent basis, and, as with the Additional FYA option, risks incentivising inefficient, low-return debt-financed investment, the Treasury said.
Given the significant tax benefit to taxpayers, the design of this measure would need to be considered very carefully to prevent abuse.
An option is to introduce full expensing of main rate plant and machinery and a 50% FYA for special rate plant and machinery.
Chancellor encourages all business to have their say
On the release of the publication, Rishi Sunak said that he wants to build on the momentum of the super-deduction to drive and sustain growth in the UK and that the government is committed to doing that through cutting and reforming investment taxes. He encourages businesses of all sizes, right across the UK, to have their say.
The consultation on the proposals runs until 1 July 2022 and the full publication which provides further details on the types of change, areas of interest and how to respond can be found here.
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Disclaimer
The information was correct at time of publishing but may now be out of date.
