The Treasury consultation on the future of the Capital Allowances regime closes on 1st July. Here’s our response:
It is encouraging to see a full review of the Capital Allowances regime to assess its fitness for purpose now and in the future. The current regime has evolved over time since its introduction in the middle of the twentieth century, and even the latest Capital Allowances Act is now twenty-one years old.
This review is timely. The last few decades have seen a downward trend in both the Corporation Tax rate and the value of Capital Allowances – both in terms of Writing Down Allowance (WDA) and of cash value. At a macro level, this has contributed to the UK’s shift away from capital-intensive industries and towards a knowledge economy significantly dependent on imported goods and materials.
We’ve all seen the resilience of global supply chains be repeatedly stress-tested in recent years. Brexit, Coronavirus, the war in Ukraine and even the container ship wedged in the Suez Canal have served to underline the strategic importance of at least some level of national self-reliance.
This review of Capital Allowances should be seen as the ideal starting point from which to strategically reframe the UK economy to favour long-neglected capital-intensive industries, thereby broadening the base of the economy and reducing reliance on imports.
Simultaneously this opportunity should be used to increase the UK’s international competitiveness in attracting foreign investment.
Areas of interest
Investment decisions
As the only tax relief available on capital expenditure, Capital Allowances are naturally a very important consideration for capital-intensive businesses. When financial models are developed for a large investment in plant or machinery, the availability of Capital Allowances can have a significant effect on the payback period for a project, and even on its outright viability.
We frequently see Capital Allowances factored in to investment appraisals for developments of wind farms, solar farms, mixed-use regeneration projects and other large-scale capital projects.
In our experience, most large-scale investors use appraisal methodologies that consider cashflow over the lifespan of the project and/or their investment horizon, adjusted to account for the net present value of the cashflows.
Signs indicate that the era of historically low inflation is ending; for years it’s been easy to overlook the way inflation erodes the benefit of Capital Allowances. Net Present Value calculations will become ever more significant.
The Super-Deduction
While marketed as a generous tax incentive, in actuality the Super-Deduction is simply the removal of a disincentive to invest: why invest now and receive relief at 19% if postponing the investment would yield relief at 25% when the Corporation Tax rate rises?
Consequently, the Super-Deduction was announced at very short notice and is in place for a relatively short window of time. When making significant capital investments, businesses plan some way into the future. It is perhaps possible that existing investment plans were brought forward but we haven’t seen any cases where the Super-Deduction generated additional investment. In most cases, the extra relief was simply seen as a welcome and unexpected bonus rather than an actual incentive.
The current system of Capital Allowances
How far Capital Allowances rates influence decisions by multinationals on which territory to invest in
In a post-Brexit world, we can’t ignore the relevance of tax policy to the UK economy’s international competitiveness, so it is pleasing to see this item on the agenda.
Following the OECD deal to impose a global minimum corporate tax rate of 15% from 2023, agile and entrepreneurial countries will begin to shift the focus of their Corporation Tax policy from tax rate to tax base.
Capital Allowances will soon find themselves on the front line of the global battle to attract inward foreign investment, yet the UK regime is currently uncompetitive and complex and offers limited amounts of certainty or predictability.
Disclaimer - Accurate at time of publication
