The long awaited report by the Office of Tax Simplification (OTS) into the proposed simplification of capital allowances was published on the 15th June 2018. It extends to 88 pages but concludes that whilst an accounts based depreciation system would be attractive, the benefits gained would be completely outweighed by the disruption suffered by businesses to achieve it. For now, the report instead recommends a number of amendments to the existing system. It will be up to The Treasury which of them, if any, it implements.
What is the perceived problem?
Only circa 30,000 businesses currently claim capital allowances above the annual investment allowances limit of £200,000. Many taxpayers frequently under claim or ignore them all together, perceiving the current system to be overly complicated that is only really understood by specialists in the capital allowances field. The OTS was therefore tasked with reviewing the system as it currently stands and exploring options to replace it.
What were the proposed solutions?
In their June 2018 report, the OTS considered a number of options; the main alternatives being as follows
- Replacing the existing system with accounts depreciation capital allowances for tangible assets. Should the capital allowances system be created today, this would probably be an easy one to implement. However, to transfer the existing system into accounts based depreciation would require a very lengthy transition period. This accounts depreciation method would be achieved through applying a writing down rate based on either the asset types in the accounts, or asset lives, or a combination of the two.
One advantage to this approach would be to remove the need to reclassify assets for tax purposes, often an area that taxpayers struggle with.
However, the accounts depreciation option would not suit all taxpayers. It would technically work for taxpayers who depreciate their fixed assets, but entities such as property investment companies generally do not depreciate. An alternative approach would therefore be required for such taxpayers to run side by side the accounts depreciation, complicating matters further.
In its findings, the OTS concluded this alternative to the existing capital allowances system would be too onerous to implement and for now has proposed not taking the option any further.
- Widening the scope of annual investment allowances (AIA). Instead of claiming AIA against plant and machinery assets, the OTS proposed for taxpayers to offset the AIA (currently at £200,000) against all assets acquired by them (excluding land and residential dwellings).
- Creation of a new Business Asset Pool. The OTS has proposed extending the scope of capital allowances by creating a new pool for all assets used by a business (excluding land and residential dwellings). This will include assets currently not benefiting from any capital allowances tax savings. A 2% rate against all such items would be cost neutral when reducing the general pool rate to 16% and special rate pool to 7%.
The OTS has effectively ruled out the accounts depreciation option, and the other options it proposes extend rather than fundamentally change the current system.
Therefore, for now, it is apparent there is no appetite for significant change. The Treasury may decide to implement some minor amendments but it is unlikely that in the short term the accounts depreciation route will be implemented.
The OTS has looked at simplifying capital allowances a number of times over the last decade or so. The current Brexit negotiations will be concentrating minds at The Treasury for a number of years to come and HMRC are unlikely to welcome further distractions. Time will tell whether, once the Brexit dust has settled, HMRC and The Treasury look to implement any of the OTS recommendations.
Lovell Consulting Viewpoint
In our experience, many companies continue to under claim their capital allowances; either as a result of poor information or a lack of knowledge. Providing the assets are still owned by the company, there is scope to claim any additional allowances due on old expenditure in current periods.
Going forwards, there would be more merit if HMRC could provide clarity on plant and machinery assets that are often challenged by Inspectors. Assets such as demountable partitions and ambient expenditure that qualify for capital allowances by virtue of satisfying the legislation and are in accordance with case law but are regularly disputed by HMRC Inspectors.
Finally, there is merit in making it easier to claim capital allowances on second hand purchases where properties are acquired from receivers. It is often impossible to satisfy the pooling requirements and S198 CAA2001 elections when property is acquired from such entities. Any simplification measures implemented in such a situation would be welcomed.