Policy paper

Potential Reforms to UK’s Capital Allowance Regime – Inviting views

Published 9 May 2022

Ahead of the end of the super-deduction next year, the government is considering reforms to best support business investment, seeking to work with firms on capital allowances to help foster a new culture of enterprise and growth in the UK. The government will share the proceeds of this higher growth fairly with working people. Spring Statement set out some illustrations of the types of changes government could make to the UK’s existing capital allowances regime (see annex for further details).

As set out in the Tax Plan, the government is considering options ahead of Budget later this year, and as part of this is continuing to review the latest evidence, including the impact of the super-deduction and views of businesses. Delivering the Tax Plan will be dependent on continued discipline on public spending and the broader economic outlook. Any Budget announcements on capital allowances will be made in light of the latest economic and fiscal position.

The government would be interested to receive written responses focused on the areas of interest set out below.

Areas of interest

• Investment decisions – The government would welcome evidence from stakeholders on how firms make investment decisions, the relative importance of capital allowances in those decisions, and how they are taken into account, such as by reference to net present values, cash-flow benefits or impacts on effective tax rates.

• The super-deduction – The government wants to incorporate the latest evidence on the impact of the super-deduction into its decision-making. As part of this, the government is interested in views on how the super-deduction has affected the investment decisions of businesses.

• The current system of capital allowances – As set out at Spring Statement, the government acknowledges that the generosity of the permanent capital allowances available in the UK compares unfavourably to some international peers and wants to know what more the capital allowances regime can do to support business investment. The government would welcome stakeholder views on how far capital allowances rates influences decisions by multinationals on which territory to invest in. The government would also welcome stakeholder views on levels of awareness of the current system and how simple it is to understand and operate, and whether it provides adequate support for business investment.

Spring Statement options

• The government would welcome views on the options set out at Spring Statement. These included increasing the permanent level of the Annual Investment Allowance (AIA), increasing the rates of Writing Down Allowances (WDAs), introducing general First-Year Allowances (FYAs) for qualifying expenditure on plant and machinery, introducing an additional FYA and introducing permanent full expensing (see annex for further detail).
• Whilst some have called for full expensing to be introduced following the super-deduction, at its peak this could cost over £11 billion in a single year. If sufficient funding were to be available, the government is interested in stakeholder views about whether this would be best spent on full expensing or better targeted through other options (including non-tax options). Similarly, the government welcomes views on how best to target our approach if less funding is available.
• The options will have different outcomes for different types of business and for the economy more widely. For instance, the impacts of the options will vary depending on whether a business is incorporated or unincorporated, profit- or loss-making, and the extent to which it values an immediate cash benefit. In addition, the options may impact incentives for firms to use debt over equity finance. The government is interested in views on advantages and disadvantages of the options, including in light of these factors.

If you are a business responding, the government would be interested to know about your business. For example, its sector, size, and the amount of capital investment undertaken annually. In the case of representative bodies, please provide information on the number and nature of people you represent.

Who should respond?

A wide range of stakeholders will be interested in potential reforms to the UK’s capital allowance regime. Responses are welcome from:

• businesses of all sizes, with an interest in UK capital allowances;
• accountants, tax advisers and legal representatives;
• trade associations and representative bodies; and
• think-tanks and research institutions.

How to submit responses?

The response window has now closed. Thank you for sharing your views.

Next Steps

The government will consider stakeholder views ahead of the Budget later this year.

Annex - Spring Statement Capital Allowances Policy Options

Capital Allowances Overview

Capital allowances allow businesses to deduct qualifying capital expenditure on certain assets such as plant and machinery. The capital allowances rules set the rates and timing at which such capital expenditure can be deducted to arrive at taxable profits.

Annual Investment Allowance (AIA)

The AIA allows most businesses to deduct the full amount of qualifying expenditure up to a set level to arrive at taxable profits. The AIA can be claimed on most plant and machinery expenditure but notably excludes expenditure on cars. The permanent level of the AIA is set at £200,000 per year, which has been temporarily increased to £1m per year between 1 January 2019 and 31 March 2023.

An option is to increase the permanent level of the AIA from £200,000 to, for example, £500,000.

Writing Down Allowances (WDAs)

WDAs spread tax relief over multiple years by allowing businesses to deduct a percentage annually from a relevant pool of qualifying expenditure to arrive at taxable profits. The pool will decrease as capital allowances are claimed and disposals are made but additional qualifying expenditure may be added to the relevant pool.

WDAs are then calculated as a percentage of the remaining pool balance, with any unrelieved expenditure carried forward to the next period. Most expenditure is added to either the main pool or the special rate pool, where WDAs are available at 18% and 6% respectively.

Generally, the main pool contains qualifying expenditure on all plant and machinery unless it is special rate (or is added to a single asset pool). Special rate expenditure primarily includes long-life assets, integral features and cars with CO2 emissions over a certain threshold.

An option is to increase the rates of WDAs from 18% and 6% to, for example, 20% and 8%.

First-Year Allowances (FYAs)

FYAs allow businesses to deduct a percentage of qualifying expenditure in the year the expenditure is incurred. FYAs are uncapped and do not count towards the AIA limit. Most FYAs provide 100% capital allowances for qualifying expenditure on specific new plant and machinery or for specific regions. For example, there is a 100% FYA for zero-emission goods vehicles and a 100% FYA for plant and machinery primarily for use in a Freeport tax site. However, FYAs have also been used to provide general incentives to invest in plant and machinery. For example, the 130% super-deduction and the 50% special rate allowance are both FYAs.

An option is to introduce general FYAs for qualifying expenditure on plant and machinery, for example a 40% FYA for expenditure on main rate and a 13% FYA for expenditure on special rate plant and machinery.

Additional FYA

An Additional FYA would allow both a percentage of qualifying expenditure to be claimed in the year the expenditure is incurred and 100% of that expenditure would still be available to be pooled with WDAs claimed in the normal way. This would provide relief above the amount of qualifying expenditure spread over time. Where an AIA claim is made on an amount of expenditure, an Additional FYA claim could not be made on the same expenditure. As an Additional FYA would relieve expenditure above the asset acquisition cost, the design of this measure would need to be considered very carefully to prevent abuse.

An option is to introduce an Additional FYA, for example at 20%.

Full Expensing

Full expensing would be the costliest measure to implement, as it would allow all qualifying expenditure to be written off in the year the expenditure is incurred and would be uncapped. No other country in the G7 has implemented this on a permanent basis, and, as with the Additional FYA option, risks incentivising inefficient, low-return debt-financed investment. The policy costing presented in the Spring Statement assumed a 100% deduction for main rate expenditure and a 50% FYA for special rate expenditure - if full expensing were extended to the latter, the exchequer cost would be considerably higher. Given the significant tax benefit to taxpayers, the design of this measure would need to be considered very carefully to prevent abuse.

An option is to introduce full expensing of main rate plant and machinery and a 50% FYA for special rate plant and machinery.

Potential Reforms to UK’s Capital Allowances Regime - Processing of Personal Data

This notice sets out how HM Treasury will use your personal data for the purposes of inviting views on potential reforms to the UK’s Capital Allowances regime and explains your rights under the UK General Data Protection Regulation (UK GDPR) and the Data Protection Act 2018 (DPA).

1) Your data (Data Subject Categories) The personal information relates to you as either a member of the public, parliamentarians, and representatives of organisations or companies.

2) The data we collect (Data Categories) Information may include your name, email address, job title, and employer of the correspondent, information about your business, as well as your opinions. It is possible that you will volunteer additional identifying information about yourselves or third parties.

3) Legal basis of processing The processing is necessary for the performance of a task carried out in the public interest or in the exercise of official authority vested in HM Treasury. The purpose of this activity is obtaining opinion data in order to develop good effective government policies.

4) Special categories data Any of the categories of special category data may be processed if such data is volunteered by the respondent.

5) Legal basis for processing special category data Where special category data is volunteered by you (the data subject), the legal basis relied upon for processing it is: the processing is necessary for reasons of substantial public interest for the exercise of a function of the Crown, a Minister of the Crown, or a government department. This function is obtaining opinion data, to develop good effective policies.

6) Purpose The personal information is processed for the purpose of obtaining the opinions of members of the public and representatives of organisations and companies, about departmental policies, proposals, or generally to obtain public opinion data on an issue of public interest.

7) Who we share your responses with Information provided in response to a consultation may be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 2018 (DPA) and the Environmental Information Regulations 2004 (EIR).

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals with, amongst other things, obligations of confidence.

In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information, we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on HM Treasury.

Where someone submits special category personal data or personal data about third parties, we will endeavour to delete that data before publication takes place.

Where information about respondents is not published, it may be shared with officials within other public bodies process to assist us in developing the policies to which it relates. In this case, your responses will be shared with His Majesty’s Revenue and Customs (HMRC). Examples of these public bodies are here.

As the personal information is stored on our IT infrastructure, it will be accessible to our IT contractor, NTT. NTT will only process this data for our purposes and in fulfilment with the contractual obligations they have with us.

8) How long we will hold your data (Retention) Personal information in responses to consultations will generally be published and therefore retained indefinitely as a historic record under the Public Records Act 1958. Personal information in responses that is not published will be retained for three calendar years after the consultation has concluded.

9) Your Rights

• You have the right to request information about how your personal data are processed and to request a copy of that personal data.
• You have the right to request that any inaccuracies in your personal data are rectified without delay.
• You have the right to request that your personal data are erased if there is no longer a justification for them to be processed.
• You have the right, in certain circumstances (for example, where accuracy is contested), to request that the processing of your personal data is restricted.
• You have the right to object to the processing of your personal data where it is processed for direct marketing purposes.
• You have the right to data portability, which allows your data to be copied or transferred from one IT environment to another.

How to submit a Data Subject Access Request (DSAR)

To request access to personal data that HM Treasury holds about you, contact:

HM Treasury Data Protection Unit 1 Horse Guards Road London SW1A 2HQ dsar@hmtreasury.gov.uk

10) Complaints

If you have any concerns about the use of your personal data, please contact us via this mailbox: privacy@hmtreasury.gov.uk

If we are unable to address your concerns to your satisfaction, you can make a complaint to the Information Commissioner, the UK’s independent regulator for data protection. The Information Commissioner can be contacted at:

Information Commissioner’s Office Wycliffe House Water Lane Wilmslow Cheshire SK9 5AF 0303 123 1113 casework@ico.org.uk

Any complaint to the Information Commissioner is without prejudice to your right to seek redress through the courts.