The Office of Tax Simplification (OTS) has published its review of ‘Accounting depreciation or capital allowances? Simplifying tax relief for tangible fixed assets’, which considered replacing capital allowances with depreciation.
The OTS looked at whether Capital Allowances could be replaced by making depreciation tax deductible.
It concluded it would make sense and would simplify the process and better represent the underlying economic cost of an asset: ultimately though the benefits would be vastly outweighed by the disruption and upheaval it would cause.
- Its merits do not constitute a case for rapid change.
- It would be ideal if starting from scratch but not as a reform.
- Using the accounts figure presents difficulties and would require alterations to the tax system.
- The vast majority of taxpayers spend less on capital assets than the available Annual Investment Allowance (AIA).
- The greatest difficulties for capital allowances are confined to around 30,000 of the largest taxpayers, where excessive spending over the AIA is common. These taxpayers are better equipped to deal with the complexities already and are generally not in support of using depreciation instead.
- Any fair transition would have to take place of a long period of time, leading to an arbitrage exposure for the Exchequer.
- Whilst not recommended now, it should not be dismissed altogether.
The report recommends that there should be a simplification of capital allowances instead:
- The scope of the AIA could be widened:
- The AIA should apply without a need to further categorise expenditure into the relevant general or special rate pool. Only where expenditure exceeds the AIA should the additional categorisation be required.
- The AIA could be extended to cover non-qualifying spending. To reduce the effect on the Exchequer, it could be a condition that qualifying spending has to be allocated first, but this would add in a layer of complexity.
- The scope of capital allowances generally could be widened:
- Allow capital allowances on all assets, with the exception of land or dwellings) with all those assets not currently qualifying, going into a pool at a lower rate.
- If the scope of capital allowances cannot be widened, an approach that uses accounts information should be considered, but not based on depreciation:
- Use the categories of tangible fixed assets in the accounts and apply a writing down allowance rate to that category.
- This should save the time taken having to align tax and accounts definitions and splitting out qualifying and non-qualifying expenditure.
- In a letter to the Treasury in December 2018 the Chancellor agreed with the OTS' conclusions and confirmed he would be asking HMRC and HM Treasury to continue looking at simplification of the capital allowance rules.
Links
Annual investment Allowance (AIA)
Capital allowances: rates and allowances
External link: OTS review
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