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Capital Allowances Consultation Announced

This week, HMRC have launched a consultation process on the current capital allowances regime and how this can be reformed to encourage business investment and growth in the UK.

Originally announced by Rishi Sunak in his Spring Statement in March of this year, several potential options for reform are being considered and the government has invited comments from businesses and other interested parties on certain key areas of the existing capital allowances regime.

The consultation invitation does not provide much more detail than the Spring Statement originally did, with the onus being on the taxpayer to provide suggestions and opinions on the current regime, rather than setting out the government’s perspective.

The 130% super deduction introduced on 1 April 2021 is due to expire on 31 March 2023.  It has been suggested that this will purely have accelerated capital expenditure, rather than boosting long-term UK productivity as was intended, and that there may well be a slump in capital spending when the deduction ceases to be available.  In light of this, the government has asked for taxpayer views on how the super deduction has impacted a business’s investment decisions. If it is determined that the capital allowances regime does have a large impact on a business’s decision to invest in capital expenditure, the government is also considering some of the other allowances available.

Some of the options to be considered are:

  • The Annual Investment Allowance (AIA) – The AIA has fluctuated since its inception in 2008, however the default level is £200,000. The government has suggested permanently increasing this backstop; however, it has not specified what the alternative default allowance would be and has asked for opinions on the figure to be used.
  • Writing Down Allowances (WDAs) – the government has suggested that it may reinstate the previous WDA rates for the main rate and special rate pools of 20% and 8%, an increase of 2% for each pool.
  • Full expensing regime – another suggestion was to introduce a regime whereby 100% relief is given upfront for all forms of qualifying expenditure, removing the need for any capital allowances regime. This is quite an extreme suggestion and one that would make the UK capital allowances regime much more generous than the OECD average. In order to counterbalance this, the government has also asked for opinions on altering the upfront “first-year” allowances available instead, with further relief given through the usual capital allowance pools in later years.  This could include increasing first year allowances to 40% of the total expenditure, or introducing a similar allowance to the super deduction.

Responses to the consultation are requested to be submitted before 1 July, and we can expect an answer from HMRC either before or as part of the Budget later this year. We will be submitting a response to the consultation so if you have any thoughts that you would like to be included please let us know.

Given the changes already proposed to the current regime and the likelihood of more changes to come, if you are planning any major capex in the next few years, please do contact either your usual BHP contact or Emily Caine within our tax advisory team to talk through the possible planning opportunities.