The Government has recently conveyed their motive to bring further reform to UK Capital Allowances (CAs) as the super-deduction scheme is set to come to an end in March 2023. The general aim of this reform is to assist UK business investment and promote economic growth within the UK following the pandemic slump. The abolishment of the super-deduction is largely down to the high cost of the policy, so the Government are looking to implement a more sustainable method for the long run.
In the statement made by the Government, they are seeking business owner’s advice on three key areas of interest. Stakeholders are asked to provide an opinion on how CAs directly affect investment decisions, the current CA system and the super-deduction policy.
Potential changes that are being considered for the replacement of Super-deductions are as follows:
- Increasing of Annual Investment Allowance (AIA) from £200,000 to £500,000.
- Increasing Writing Down Allowances (WDAs) from 18% and 6% (General Pool and Special Rate pool) to 20% and 8% respectively.
- Implementing of permanent First-Year Allowances (FYAs) of 40% for General Pool and 13% for Special Rate.
- Implementing additional FYA at a rate of 20%, this would allow 20% of qualifying expenditure to be claimed in the first year, but this 20% would not be deducted from the following years WDAs.
- Implementing full expensing, 100% FYA for General Pool and 50% FYA for Special Rate.
Lovell Consulting Comments
Overall, we are encouraged by efforts to include the business owners in the reform discussions and some policies suggested have potential to encourage capital investment.
The majority of policies are more sustainable in the long run than the current super-deduction scheme except for a full expense system. Although this would be beneficial to the economy for capital investment it would come at a similar cost as the super-deduction scheme, we therefore view this as unlikely to be implemented.
We would like to see an increase in the AIA but to a higher limit of £1.5m with indications this will be a permanent feature of the UKs CA system. The other suggested policies could also be effective but there are still problems yet to be addressed.
A few additional policies we have lobbied for and would like to see implemented in this Capital Allowances reform include:
- Implementing an allowance for green plant and machinery to promote growth whilst helping policy makers reach their own non-economic targets since Enhanced CAs have not been replaced since their abolishment in April 2020.
- Reform to the Structures and Buildings Allowance. This allowance mainly benefits large utility companies who hold assets long term and few companies have a 33 year time horizon. The allowance is too slow to be effective and many companies do not even chose to claim it especially when it is claw back if claimed via higher capital gains when a property is sold.
- Super-deduction remodelled to a more sustainable level by limiting qualifying plant and machinery or placing a cap on total expenditure that can qualify for Super-deduction rates.
These policies in our opinion would be effective at promoting growth post pandemic and increasing capital investment.
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