Potential reforms to the UK’s capital allowances regime

The Government has published a policy paper asking for views on the future of the UK’s capital allowances regime.

The Government has published a policy paper asking for views on the future

At the Spring Statement earlier in the year, Chancellor Rishi Sunak stated that “capital investment by UK businesses is considerably lower than the OECD average of 14 percent” adding that following the end of the Super Deduction next year, the UK’s “overall tax treatment for capital investment will be far less generous than other advanced economies.” The Chancellor committed to fixing this by cutting tax rates on business investment. As the first step, the Government has now published a Policy Paper asking businesses to comment on the capital allowances regime and in particular the impact it has on their investment decisions, with a view to announcing potential reforms at the Autumn Budget. Overall, these developments are welcome and provide an opportunity to think about longer-lasting reforms, which could provide businesses with more stability. However, discussion of any sort of ‘above the line’ credit, is notably absent.

The Policy Paper which has been published outlines three key areas of interest which the Government is keen to gather views on. These are:

  • The relative importance of capital allowances on investment decisions;
  • How the super-deduction specifically has affected investment decisions; and
  • The capital allowances system in general, in particular on the decision-making process of multinationals considering investing in the UK, and overall awareness of the current system.

In addition, the Government is seeking views on the potential options outlined in the Spring Statement, which were:

  • Increasing the permanent Annual Investment Allowance level from the current level of £200,000 to, say, £500,000;
  • Increasing Writing Down Allowances for Main and Special Rate Pools from the current levels of 18 percent and 6 percent respectively to, say, 20 percent and 8 percent;
  • Introducing a First Year Allowance for Main and Special Rate Pool assets, for example of 40 percent and 13 percent;
  • Introducing an Additional First Year Allowance to bring the amount claimed over time to over 100 percent of cost, for example by introducing a First Year Allowance of 20 percent in addition to the standard Writing Down Allowance on the full cost; and Year Allowance of 20 percent in addition to the standard Writing Down Allowance on the full cost; and
  • Introducing full expensing, either 100 percent for Main Pool and 50 percent for Special Rate Pool assets, or 100 percent for all plant and machinery.

The Government has also expressed a desire to hear thoughts on whether potential funding for full expensing (around £11 billion per annum at its peak) could be better spent elsewhere, and whether a more targeted approach could be better if less funding was available. It is also interested in the disparate impacts of the different options on differing businesses.

Overall, the Government’s intention to improve the competitiveness of the UK’s tax treatment on capital investment is very welcome, particularly given the UK comes out lowest of the G7 when looking at the net present value of different countries’ capital allowances, and some way short of the OECD average.

While the Super Deduction has proved a valuable incentive for those able to make use of it, in many cases the short window during which it is available has left businesses struggling to make the most of it, particularly on larger projects with long lead times. Clearly a longer-lasting reform will provide more stability and will no doubt be welcomed by businesses looking to plan their longer-term investment strategy. Notably absent from the Government’s proposals, however, is any sort of above the line credit, which could create a powerful incentive to invest for some types of business.

KPMG UK will be responding to the consultation and if you wish to suggest points to include, or discuss the potential impact of the proposed changes, please reach out to your regular KPMG contact. You may also wish to respond directly. Responses are sought by 1 July 2022.