What does the future hold for capital allowances?
In the March 2021 Spring Budget, the then Chancellor Rishi Sunak introduced the capital allowances ‘super-deduction’, a temporary incentive to encourage capital investment by companies as part of efforts to stimulate renewed UK business activity after the coronavirus pandemic restrictions.
The super-deduction is currently scheduled to end on 31 March 2023 as does the temporarily enhanced annual investment allowance which is currently available.
In light of this, HM Treasury published a policy paper on 9 May 2022 exploring potential reforms to the capital allowances regime and encouraged organisations and businesses across the UK to have their say.
What happens now?
The consultation closed on 1 July 2022 and Government is expected to provide a summary of the feedback and announce its intended response in the Autumn Statement 2022.
By then of course we will have a new Prime Minister and whether it is Sunak or Truss who wins the leadership election, let’s hope that any capital allowances reforms which are announced ‘best support business investment and help foster a new culture of enterprise and growth in the UK’ which the Government has stated it is aiming for.
What is the feedback from the consultation?
Some of the responses to the consultation paper have been reported in the press, with accountants calling on the government to stop tinkering with capital allowances and make them more generous so that companies are encouraged to invest.
The consensus of opinion among the main bodies representing tax experts is that businesses would benefit most from a simple system that does not change, with Adrian Rudd, chair of CIOT’s corporate taxes committee, saying “We need an end to the chopping and changing of reliefs for business investment.”
“The overwhelming feedback that we have received from businesses and their tax advisors is that, when making investment decisions, stability and certainty are more important to them than the particular rate of relief.”
The ICAEW pointed out that one of the main reliefs aimed at small companies — the annual investment allowance — had seen “constant change”, there having been seven different limits over the course of 11 years, ranging from £25,000 per annum to £1 million per annum. This has made it difficult for businesses to make investment decisions with certainty over the amount of available allowances.
The ICAEW also said the ideas in the consultation paper were “disappointing” and advocated for more generous reliefs, such as shifting allowances to a form of tax credit, similar to how research and development tax relief is provided. This cash benefit would support loss-making companies as well as those making a profit and provide a powerful incentive to invest for some types of business.
Lisa Wilson, Partner and Head of Tax at Cowgills comments “It’s widely accepted that the availability and timing of capital allowances plays an important part in investment decisions, especially in capital intensive sectors such as infrastructure and renewables, and businesses (and their advisors) would welcome certainty to help them manage the post-tax and cash flow effects of investment decisions.
“A longer-lasting reform rather than frequent changes to the regime would provide more stability and undoubtedly be welcomed by businesses looking to plan their longer term investment strategy.
“Further, where investment is uncertain or is able to take place in different jurisdictions, businesses need an appropriate incentive to invest in the UK and so a clear road map for the capital allowances regime is needed to ensure confidence in the tax cash flow considerations factored into the investment appraisal process.”
There is consensus across the political spectrum, including both potential future Prime Ministers, that the key to the UK’s economic future is generating growth, and that creating the right conditions for businesses to invest is central to delivering that growth.
So, whilst it is difficult to make any predictions with the current political climate, it’s anticipated that potential changes to capital allowances to incentivise business investment may retain momentum.
We await the Autumn 2022 statement. For any queries, please don’t hesitate to get in touch with our expert team of accountants across Bolton, Liverpool, Manchester and Ilkley.
The information was correct at time of publishing but may now be out of date.