The UK Government is considering making changes to the capital allowances regime to better support UK business investment, and to build on the momentum that has been generated from the temporary super-deduction. It is part of a wider move to foster a new culture of enterprise and growth to improve the UKs productivity. There is a focus on putting in place an enduring and stable regime, by taking a longer-term view on how capital allowances can be used as a lever for growth for UK businesses, and to increase competitiveness compared to other G7 countries.
In recent years, there have been several incremental changes to the capital allowances regime; some measures have been targeted and temporary, whilst fundamental changes - such as the introduction of structures and buildings allowances - have been designed to be permanent. The Office for Tax Simplification, and other bodies, have considered how the regime could be updated; however, this is the first point in a long time where the Government is considering conducting a holistic assessment as to how to leverage the regime to drive inward investment and further boost productivity.
To assist with this, a policy paper was launched by HM Treasury in May 2022 to seek the view of business and other key stakeholders on four key areas. These areas include:
- the direct impact on investment decisions
- the take-up of the super-deduction that ends next year
- feedback on the current system of capital allowances
- views on potential options set out in the Spring Statement.
PwC surveyed a wide range of businesses to seek views on the key areas being explored. Among the companies we surveyed, 69% of respondents have an annual turnover of £100 million or more, and the two largest company types are private companies (39%) and UK subsidiaries of a non-UK parented multinational (31%).
Almost half of our survey respondents agreed that the current UK capital allowance regime encourages their investment; however, they noted that the availability of workforce and skills – along with appropriate infrastructure – plays the most important part in determining where investment is made.
The latest proposed reforms present an opportunity to build on this by increasing the regime’s appeal. Our findings make it clear that simplicity and certainty are key. As the capital allowances legislation has evolved, so has its complexity. Nearly all of our respondents (94%) value simplicity as being important, with 39% saying it was the most important attribute to them in considering any updates to the capital allowances regime.
However, businesses are divided on how to achieve this. After you factor in a company’s size, sector and requirements, there is clearly no ‘silver bullet’ – what is considered a simple approach for one business might not be simple for another. Therefore, the proposed reforms face a challenge - they will need to address how to achieve simplification in a way that broadens the regime’s reach for business. Doing this will be key to enabling businesses to effectively factor the regime into their investment decisions. It will afford businesses the security they need to make forward-looking plans which will utilise capital allowances.
Our survey results found that the vast majority of businesses have claimed, or are planning to claim, the super-deduction. Of these, 48% have either increased or brought forward their investment decisions due to its introduction. This suggests the regime has been successful in placing a spotlight on investment decisions in 2021–23. However, more than one-third of businesses said they felt the temporary window was too short – respondents identified this as the number-one reason why they could not fully optimise the super-deduction benefit.
Spring statement options
Respondents to our survey considered the preferred options outlined in the Spring Statement; key results suggested:
- Significant support exists (71%) for increasing the rates of writing down allowances available for the main pool and the special rate pools.
- 49% of respondents were in favour of the super-deduction being made permanent or a similar, permanent uplift by way of a First Year Allowance (FYA) for plant and machinery expenditure was supported by 44% - this indicates a strong preference for the continued availability of FYA within the regime.
- Notably, whilst many respondents did not consider the AIA a significant factor in their investment decisions - 56% would still be in favour of a permanent increase of the total quantum available.
- Respondents showed support for creating an ‘above the line credit’ for specific expenditure (39%), if properly devised, such an introduction would allow loss-making businesses to realise a more immediate benefit and recognise part of the value of their investments in the P/L.
Tackling the environmental and energy crises
With the Government’s focus on net zero and the global energy and climate crisis, businesses agree that green incentives will stimulate investment. However, our data suggests they are split on how to achieve this, with a criterion-based approach receiving the most support. As part of our engagement with HM Treasury we have highlighted how, with energy security now being a critical limiting factor to growth and productivity, the reduced or basic allowances available on many ‘green’ assets e.g. photovoltaic solar panels (which, even in the current temporary window, will only receive a 50% first year tax deduction) appears to be unsuitable.
Even if these more obvious areas can be tweaked, we have been considering how any future reforms may be augmented to further reflect the UK’s net zero ambitions? One such way could be to incentivise renovations and reuse; for example, by providing a full (or certainly increased) tax deduction for revenue expenditure and repairs costs, capitalised in the accounts, in the year of expenditure. Such a relief (we suggested ‘sustainability allowance’) may incentivise businesses to commit to more sustainable investments, reducing the environmental costs of development and preserving the industrial heritage of existing sites.
What’s next?
We expect the results and any changes to the regime to be announced as part of the Autumn Budget. In the meantime, PwC will continue to engage with stakeholders to help build clarity on what the new landscape for capital allowances could look like.
If you would like to discuss the current regime or the proposed changes, please get in touch.
