Independent report

OTS review on simplifying tax relief for fixed assets

The OTS is publishing today a report that explores the issues surrounding the option of replacing capital allowances with accounting depreciation


Accounting depreciation or capital allowances report - print version


In this review, the Office of Tax Simplification (OTS) has looked at the impact and issues arising if capital allowances were to be replaced with a system based on using the deprecation information in business accounts.

If this change was applied to the whole range of tangible assets, the simplification benefit would be the removal of the separate, and often complex, process of determining which assets qualify for capital allowances, which at present runs alongside the depreciation process inherent in the preparation of accounts.

Angela Knight, OTS Chairman said:

If we were designing a system to give relief for capital expenditure of this kind from scratch, depreciation could work perfectly well and would make a lot of sense. However, our analysis has shown that the undoubted simplification benefits would not be worth the disruption of the wholesale upheaval involved. As only 30,000 businesses claim capital allowances in amounts exceeding the level of the Annual Investment Allowance, we consider that the focus should be on improving the existing system.

Paul Morton, OTS Tax Director said:

The idea of using a deprecation-based system is very attractive in principle and has repeatedly come up in discussions over the years, given the difficulties of the boundaries involved in the present system - not least in relation to buildings. But it seems clear from the analysis we’ve published today that the extent of the change that would be necessary across businesses generally would be disproportionate to the benefits available.

However, what has come through is a strong desire to see improvements to the existing system, in particular to look at extending the scope of assets which qualify for inclusion within the present £200,000 Annual Investment Allowance, which is such a key feature of the system for most businesses.

This review was requested by the Chancellor in response to one of the main recommendations in the OTS’s July 2017 report on the simplification of the corporation tax computation, and has considered the position in relation to unincorporated businesses as well as companies.

Notes for editors

The OTS is the independent adviser to government on tax simplification, challenging tax complexity to help all users of the tax system; it does not implement changes - these are a matter for government and for Parliament.

The OTS team is led by Chairman Angela Knight CBE and Tax Director Paul Morton and has a small staff drawn from HM Treasury, HM Revenue and Customs and the private sector.

The OTS works to improve the experience of all who interact with the tax system. It aims to reduce the administrative burden - which is what people encounter in practice - as well as simplifying the rules. Simplification of the technical and administrative aspects of tax are each important, both to taxpayers and HMRC.

Press Enquiries only please contact Graham Dickson, OTS Press Officer Phone: 03000 585028

Published 15 June 2018