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The Government Consultation Over Potential Capital Allowances Reform in the UK

published on 13 July 2022 | reading time approx. 3 minutes

During the Spring Statement, Chancellor Rishi Sunak referenced a UK business capital investment rate of 14 percent – a metric some way below the OECD average.

While the Super-Deduction allowance is due to end in March 2023, the government is considering a range of alternative measures and capital allowance reforms to incentivise increased investment levels.

The Tax Plan included a consultation process, whereby respondents were invited to share views and opinions on the proposed reforms and how these will alter the current capital allowances structure.

The Objectives Behind the Capital Allowances Consultation

The Super-Deduction, offering elevated allowances on qualifying investments, is a short-term two-year initiative, which began as the COVID-19 pandemic was still very much in evidence.

Eligible spending on new plant and machinery receives a 130 percent allowance, whereas special rate assets (such as integral features) benefit from a 50 percent year one allowance.

Chancellor Sunak has suggested that when the scheme ends, the comparable capital allowances in the UK will fall behind other economies and potentially restrict investment into British business sectors. This assessment may be accurate since the UK ranks the lowest of the G7 nations when comparing the relative capital allowance NPVs per country.

Although the government has committed to reducing tax rates charged against business investment, exactly how it goes about doing so is up for debate. The new Policy Paper requested input from businesses, particularly in understanding whether the proposed reforms would materially impact their investment likelihood.

Any reforms taken forward could be announced as early as the Autumn Budget 2022.

Areas of Capital Allowance Reform Consultation

The Policy Paper was published after the Tax Plan and set out several areas where stakeholders were asked to submit their views. Although the scope of the Paper was fairly broad, it focused on a few key questions.

Investment Incentives

Respondents were asked how they make decisions about when, where and how to invest - and the impact capital allowances have on those decisions.

The survey also asked how businesses assess the effect of allowances, such as considering benefits to cash flows, effective tax rates or net present values.

The End of the Super-Deduction

Participants were asked to provide evidence about how the super deduction has influenced their spending and what the end of this scheme will mean for future investments.

Current Capital Allowances

While there are strong indications that some reforms will proceed, the Spring Statement identified the lack of parity for international businesses and looked for input into new ways to stimulate business spending.

Example consultation questions asked about the impact of capital allowances on multinational investments, an awareness of the existing system, and whether it is sufficiently simple to use and understand.

Tax Plan Spending

If all proposed reforms went ahead, the cost to the Treasury would be upward of £11 billion a year. Hence, the government wanted to receive feedback about whether that budget would be most effectively spent on fully expensing every proposal, split between non-tax options, or used to provide targeted funding if the required budget is unavailable.

Capital Allowance Adjustments Suggested Within the Tax Plan

The Tax Plan includes numerous areas highlighted for possible change.

First-Year Allowances

First-year allowances, or FYAs, support business purchases with up to a 100 percent allowance against eligible costs within the first year of acquisition – depending on the circumstances. They apply to specific types of business assets and within regions.

A proposed change is to introduce a general FYA across all qualifying expenditures, which could be a 40 percent FYA for main-rated assets and 13 percent on special rate plant or machinery.

Additional First-Year Allowances

The concept of an Additional FYA is that businesses could claim an allowance for investments in year one and still use the expenditure to pool with other expenditure groups to apply for Writing Down Allowances (WDAs). Businesses would be able to spread relief over time and also gain immediate tax relief. However, an investment used to claim the Annual Investment Allowance (AIA) would not be dually eligible for an Additional FYA.

In effect, claiming Additional FYAs would allow businesses to apply for allowances over and above the asset's initial cost. The government proposes an Additional FYA capped at potentially 20 percent.

Annual Investment Allowances

Annual Investment Allowances (AIA) permit businesses to claim relief up to £200,000 a year, increased to £1 million per annum from 1st January 2019 until 31st March 2023. A suggested change would lift the permanent AIA level to £500,000 from 2023 onwards.

Full Expensing

Expensing every investment in year one would cost a significant amount, and although there is a case for incentivising UK business investment, implementing 100 percent expensing would also be risky.

Outcomes could include a climate of debt-financed investment with low returns and an inherent burden on stretched taxpayers. The suggested compromise could be to provide full expensing in year one, but only for main pool plant and machinery, with a 50 percent FYA for special rate assets.

Writing Down Allowances

Finally, Writing Down Allowances, or WDAs, are calculated using a percentage of the asset pool.

Investments are either categorised as part of the main pool or special rate pool, and businesses can claim allowances of 18% and 6% per tax year, respectively. The proposed reform here is to potentially increase the WDAs to 20% and 8% per annum.

Capital Allowances Policy Paper Consultation and Outcomes

There will be different opinions and possible outcomes depending on which or how many options are adopted and according to the nature of each business. Examples include profitable vs loss-making companies and incorporated vs unincorporated organisations.

There will also be differences in how businesses interpret the allowances and whether they would have a tangible impact on their investment plans. Therefore, the government included some categorisation questions within the consultation, asking about business size, sector, and average annual capital investments.

Stakeholders specifically requested to participate included:

Financial professionals
Trade unions and related bodies
Research enterprises
Any business with an interest in the British capital allowance system

Consultation responses were accepted until 1st July at 5 pm (UK time) to give sufficient time for assessment and debate about the outcomes before any announcements are made in the forthcoming Statements (as early as the Autumn Budget 2022).