A&M Tax Advisor Update
Now the window has closed for responses to the HMT policy paper for potential reforms to the UK Capital Allowances regime, can we shed any light on:
As the Conservatives place their votes, it’s time to place your bets.
As noted by the Spring Statement, the UK currently lags well behind other OECD economies when it comes to business investment, accounting for 10% of UK GDP compared to an average of 14%.
The Spring Statement attributed this to the comparative low levels of tax relief from the Capital Allowances regime, again against OECD peers. This provides a base case to increase the reliefs available to incentivise investment.
Following the statement, the consultation was published on 9 May and put forward several options for improvement, including:
Responses were requested from a range of stakeholders. So post close, A&M has its own thoughts and predictions on what we might see and what we would like to see.
An elephant in the room – where’s the tax credit?
More notable than the full expensing option, is the absence of a tax credit for Capital Allowances.
Given that the benefit of allowances will only be felt in a tax paying position, loss making businesses can only bank allowances for future use. This is an oversight, particularly when considering investment in development of real estate assets which are unlikely to generate sufficient chargeable profits to utilise full capital allowances relief in the initial years.
A&M would like to see a tax credit introduced that provides a 5 year sliding scale of tax credit against the annual WDA where allowances cannot be fully utilised.
Perhaps, rather than an unwieldy additional FYA, a bonus tax credit could be introduced to encourage specific types of investment, for example energy efficient plant and machinery.
An elephant in the apartment – where are the allowances!
A&M also note that no suggestion was made relating to encouraging investment in the growing PRS market.
At present, stand alone dwellings (apart from HMO’s) and apartments are excluded from relief through capital allowances. Allowances are only available on the common parts and plant serving those common parts.
This seems at odds to other attempts to increase housing stock and help affordability including:
A&M would like to see targeted inclusion of PRS dwellings within the scope of Capital Allowances claims. This could include:
Inclusion of allowances would offer a significant increase in the recovery of the costs of development, improving margin and encouraging greater investment.
This would help the UK Government realise its target of 300,000 new homes being built every year, as well as remove a somewhat archaic bar on claiming allowances in the modern residential investment market.
Allowing for enhanced reliefs against energy efficiency improvements would address the cost of energy with long term reductions in energy use. This would offset the requirement for future cost of living support and address the underlying energy consumption.
Allowances as the Budget Day rabbit from the hat, with a vanishing trick
The introduction of Super Deductions in Budget 2021 was a welcome surprise, giving a 130% FYA against main pool assets and a 50% FYA against the special rate pool. On the face of it, a clear incentive for investment within a window closing on 31 March 2023.
However, they come with a sting in the tail in the form of clawback of allowances through a balancing charge at disposal. While this can be offset under fixtures legislation using a s.198 election, no such option is available for a material disposal value under Part 2 allowances outside of the fixtures regime.
Without a tax credit, the assumption is that a full claim can be taken in year, which may not be the case.
So rather than suggest an extension of the Super Deduction, A&M would prefer to see a permanent FYA at a lower level, that has no balancing charge provision and also has a tax credit option.
This option, without the tax credit, is suggested by the consultation, along with an additional FYA which could be spread over the initial years of claiming.
This latter option would introduce an unnecessary level of additional compliance, as the same benefit could be obtained through adjusting the suggested permanent FYA with a tax credit option.
AIA – maintain the current level
The current AIA, at £1.00 million, provides a simple form of tax relief for the majority of small and medium sized businesses that reduces tax compliance and does not require detailed claim reporting.
As such, A&M advocates maintaining the AIA at its current level, to provide a net £190,000 per annum tax relief.
Assuming the planned increase in Corporation Tax from 1 April 2023 goes ahead, this requires an adjustment to AIA to £750,000, rather than allowing it to return to the base level of £200,000 per annum.
This is perhaps the easiest option put forward by the policy paper.
The current WDA rates don’t accurately reflect the anticipated life of assets, in both fixtures and non-fixtures scenarios.
This is a simple change, requiring no additional new legislation or additional tax compliance burden.
A&M favour a return to 25% for the main pool assets, with 10% for the special rate pool. This returns the rates back to their previous positions (for main pool pre 2008 and special rate pool to its introduction in 2008).
This would allow for residual values of 6% at year 10 for main pool assets, a fairer reflection than the current 14%.
For the special rate pool, with longer asset lives, the 10% rate would give written down values of 7% at year 25, compared to the current level of 21% which is too high.
The final option put forward by the policy paper, full expensing, would appear to significantly simplify the current process of claiming Capital Allowances.
However, as above, it assumes sufficient chargeable profit is available to utilise the relief in full. Where full expensing creates, or adds to a loss, the relief may be delayed and also subject to loss restriction rules, creating further timing issues.
Allowing partial disclaiming and addition to the main and special rate pools would be beneficial in full expensing. This is already available with FYA’s, so would be a minor tweak to an otherwise large change in the Capital Allowances regime.
The policy paper was published before the imminent change in leadership in the UK Government. Against this backdrop and new Chancellor, the only certainty is that the proposals put forward are subject to further change.
However, with most leadership candidates promising tax cuts, A&M believes the potential changes to incentivise business investment may retain momentum.
Once the leadership circus has ended, we will get a sense of whether the sleight of hand will produce a rabbit, make the elephant disappear or collapse the tent entirely!