As the UK Government continues to focus on improving productivity and driving growth in new industries, Capital Allowances are seen as one of the key levers to drive investment in productive plant and machinery, as well as new infrastructure and industrial regeneration, with a view to stimulating both growth and long-term improvement in efficiency and competitive advantage.
Full expensing is a generous 100% or 50% first year allowance for companies investing in new plant and machinery. The UK Chancellor’s announcement of full expensing being made permanent is a long-term signal to investors (both home and abroad) and UK business that the UK has an enduring commitment to businesses locating their activities here.
So why has HM Treasury launched a technical consultation for capital allowances in the wake of the permanent full expensing announcement? What changes are they planning? And how is it likely to impact the well established regime (and associated case law) in the coming years? Importantly, are the changes going to be so significant that we even see a rewrite of the legislation in a Capital Allowances Act 2024?
The HM Treasury led technical consultation has been launched following full expensing being made permanent. In the public statements, the Treasury has made clear that the focus of this consultation is to consider whether reforms need to be made to the capital allowances legislation in light of permanent full expensing; this will particularly be focused on the plant and machinery part of the legislation (with Treasury going as far as to state that other allowances, e.g. structures and buildings allowances and research and development allowances etc. are not expected to be within scope).
The technical consultation will take place throughout 2024, with a view to considering whether changes are required and even publishing draft legislation this year.
It is important to note that HM Treasury has made clear that it is not seeking to change the scope of what does and does not qualify for plant and machinery allowances; further, they would clearly be wary of anything which may increase the chances of avoidance schemes / arrangements.
Whilst full expensing is a broad relief, there are many assets that will not qualify for full expensing e.g. second-hand assets, cars, and assets used for leasing (albeit the Treasury are undertaking a separate consultation in respect of the availability of capital allowances on assets used for leasing).
In addition, some taxpayers may not want to claim full expensing allowances for broader tax and commercial reasons. For example, they may not want to commit to the increased tracking requirements for their assets, or they may wish to ‘hang-on’ to the, often more flexible, writing down allowances, rather than creating tax losses.
For these reasons, we would not expect there to be any fundamental changes to the present writing down allowance system or the writing down allowance rates (which have been reduced substantially over the past fifteen years).
In addition, we would expect there still to be a place for the short life asset regime and for most of the fixtures legislation (which was amended considerably in the last decade) to remain in force.
Given the above, it would appear that the sorts of changes we may see are likely to be less wholesale and more tweaks/tidying to areas where the legislation is no longer relevant or where evolving commercial practices penalise certain methods of acquisition/financing.
A good example would be the ‘transfer and hire-purchase’ rules, which preclude a company that acquires assets and then subsequently finances them with a bank (through a transfer and immediate hire purchase back) from claiming full-expensing; a very different answer to if the company simply hire-purchased the assets without the step of (even briefly) owning them. When these rules were introduced fifteen years ago, such transactions were not as common as they are now; therefore there is an argument to revisit the legislation to consider if it still meets the policy intent.
Away from full expensing, the Treasury may wish to look at the complicated AIA rules for controlled companies which, through their (understandable) design focused on anti-fragmentation, can cause significant restrictions to many PE backed businesses who regularly feel that it is easier to forgo claiming this allowance rather than undertaking the cumbersome analysis that is otherwise required.
When PwC last surveyed businesses regarding capital allowances, it was clear that a majority of respondents felt that the regime was too complicated. Some of this complexity is natural, a regime built, in large parts, on case law will never be simple and, short of a full rewrite, this will endure.
That being said, there remain a number of small ‘irritations’, akin to those set out above, that are more problematic; where two very similar scenarios can yield wildly different answers. It is possible that HM Treasury and the working group will consider where small tweaks could reduce the administrative burdens and unequal outcomes for many taxpayers.
This remains to be seen; large reforms to tax regimes can create as much complexity they remove; however it could be that the changes that we ultimately see create a level playing field for all companies investing in capital assets so as to maximise the policy aims of stimulating investment and improving productivity.
At PwC, we will be responding to this technical consultation and we would welcome your thoughts on what could be tweaked or changed to improve the regime. Please get in touch if you would like to discuss the consultation or wider capital allowances matters further.
