OTS capital allowances consultation update

    The Office of Tax Simplification (OTS) published its long awaited consultation report on the simplification of the capital allowance system on 15 June 2018. The report extended to 88 pages and concluded that the replacement of capital allowances with accounting depreciation, although beneficial, would be a highly disruptive undertaking. Rather than a complete overhaul of the system, the report recommended a number of smaller amendments. 

    The OTS consultation was initiated due to a perceived complexity with the capital allowance regime. In 2008, The Annual Investment Allowance (AIA) was introduced which greatly simplified capital allowances for many small business. However, around 30,000 businesses still claim capital allowances over the AIA limit (currently £200,000). Even those businesses within the AIA limits – those which have relatively simple capital allowance computations – still frequently under claim due to confusion over the classification of assets for tax purposes. 

    The main focus of the OTS consultation was exploring the possibility of replacing capital allowances with accounting depreciation. It was concluded that the complexity of any transition period would be extremely onerous on businesses. During any transition period, two systems would have to operate, adding further complexity to what is already considered a difficult to understand area of taxation. The report also considered that not all businesses depreciate their assets, therefore the likelihood of needing two systems running side by side would perhaps be permanent. 

    Although the replacement of capital allowances with accounting depreciation has been rejected, the OTS consultation report did explore other ways of improving the system. It has recommended two main options. 
    • Enhancements to the AIA. Currently, the AIA is available for all plant and machinery assets. Items such as special rate pool equipment and cars have to be dealt with outside of the AIA. The OTS proposed that the AIA be widened, to capture other assets not currently part of the AIA system. 
    • The idea of full scope capital allowances. This would require the creation of a new capital allowance pool for new business assets (but not land or dwellings) which do not qualify under any of the existing CA provisions, written down at a prescribed rate. 

    What is apparent from the OTS consultation is that no significant desire for a major change exists. The capital allowances system has undergone a significant number of changes in recent years, but the fundamental principle of the system has remained constant. The last OTS consultation suggests this trend of tweaks rather than major overhaul will continue for the foreseeable future. 

    Our specialist capital allowances team can assist with identifying and submitting capital allowances claims on behalf of your clients, ensuring their tax relief is maximised. If you’d like to know more about how we can help you and your clients please call Natalia Shaw, Business Development Manager, on 0114 236 4457 or email marketing@abbeytax.co.uk