As we highlighted earlier this year, the government is currently reviewing the capital allowance regime and has invited stakeholders' views on a series of potential reforms. The Chartered Institute of Taxation, the Association of Taxation Technicians and the Instutute of Chartered Accountants in England and Wales have now formally responded.
The suggested reforms include:
- Increasing the permanent level of the Annual Investment Allowance (AIA) - the permanent level of AIA is currently £200,000 though this has temporarily been increased to £1m until March 2023;
- Increasing the rates of Writing Down Allowance (WDA) - the current rates are 18% for assets going into the Main Rate Pool, and 6% for assets going into the Special Rate Pool (historically these rates were much higher);
- Introducing a general First Year Allowance (FYA) for qualifying expenditure on plant & machinery - FYAs are uncapped and do not count towards the AIA limit, the policy paper suggests a 40% FYA for Main Rate expenditure;
- Introducing an additional FYA at 20% - with 100% of the expenditure then going into the Main Rate or Special Rate Pools and subject to further WDA claims; and, perhaps most controversially,
- Permanent full expensing, which it is claimed could cost the government up to £11bn in a single year.
The Association of Taxation Technicians (ATT) says it is concerned that the proposed reforms overlook the needs of small businesses and may weaken the Government’s drive to foster a new culture of enterprise and growth in the UK. Senga Prior, Chair of the ATT’s Technical Steering Group, said:
“We remind the Chancellor that capital allowances affect an extremely wide range of businesses, from the smallest unincorporated sole trader such as a plumber to the most complex multinational corporate group. He must avoid a one size fits all solution in the effort to support business investment or risk an expensive mistake that fails to foster a new culture of enterprise and growth in the UK.
“The reform options in his Spring Statement focus on the timing and level of relief for qualifying capital expenditure but they will have little or no impact on those smaller businesses which do not spend above the Annual Investment Allowance (AIA). A more pressing issue for smaller businesses is the complexity of the current capital allowance regime.
“Before he reports back on these proposals at the autumn 2022 Budget, we urge the Chancellor to look not only at how to incentivise greater capital investment by high-spending businesses but also at how to simplify the capital allowances rules for smaller businesses and make them more coherent. We also suggest setting an appropriate AIA limit and sticking to it, rather than making repeated, often last minute, changes which reduce certainty and can catch out smaller businesses."
“All sizes of business would benefit from a capital allowances regime which is stable and not subject to frequent changes. This would remove complications for smaller businesses where the AIA threshold is reduced as well as facilitating easier investment decisions for larger businesses.”
The full response can be read here.
The Chartered Institute of Taxation (CIoT) is calling for more stability and certainty in the capital allowances regime, saying these are more important to businesses than any particular rate of relief in encouraging them to invest in new equipment, machinery or business vehicles. Adrian Rudd, Chair of CIOT’s Corporate Taxes Committee, said:
“We need an end to the chopping and changing of reliefs for business investment. This will bring stability to the tax system and provide a sustainably supportive treatment of business capital investment for business income and corporation tax purposes.
“There is consensus across the political spectrum, including both Conservative leadership contenders, 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.
“The overwhelming feedback that we have received from business and their tax advisers is that, when making investment decisions, stability and certainty are more important to them than the particular rate of relief.
“We encourage the Government to consider their longer-term strategy in relation to business investment and capital allowances. This review should include a wider, more strategic consideration around which businesses and what investment by those businesses it wishes to encourage. The resulting changes should have clear policy aims around what is incentivised."
The full response can be read here.
The Institute of Chartered Accountants in England and Wales (ICAEW) is calling for "more innovative thinking" in the government's approach to incentivising business investment. Their response can be read here.