+44 (0) 20 7329 1300

OTS – Report on Proposed Capital Allowances Simplification

The long awaited report by the Office of Tax Simplification (OTS) into the proposed simplification of capital allowances was published on the 15th June 2018.  It extends to 88 pages but concludes that whilst an accounts based depreciation system would be attractive, the benefits gained would be completely outweighed by the disruption suffered by businesses to achieve it.  For now, the report instead recommends a number of amendments to the existing system.  It will be up to The Treasury which of them, if any, it implements.

What is the perceived problem?

Only circa 30,000 businesses currently claim capital allowances above the annual investment allowances limit of £200,000.  Many taxpayers frequently under claim or ignore them all together, perceiving the current system to be overly complicated that is only really understood by specialists in the capital allowances field.  The OTS was therefore tasked with reviewing the system as it currently stands and exploring options to replace it.

What were the proposed solutions?

In their June 2018 report, the OTS considered a number of options; the main alternatives being as follows

  • Replacing the existing system with accounts depreciation capital allowances for tangible assets. Should the capital allowances system be created today, this would probably be an easy one to implement.  However, to transfer the existing system into accounts based depreciation would require a very lengthy transition period.  This accounts depreciation method would be achieved through applying a writing down rate based on either the asset types in the accounts, or asset lives, or a combination of the two.

One advantage to this approach would be to remove the need to reclassify assets for tax purposes, often an area that taxpayers struggle with.

However, the accounts depreciation option would not suit all taxpayers.  It would technically work for taxpayers who depreciate their fixed assets, but entities such as property investment companies generally do not depreciate.  An alternative approach would therefore be required for such taxpayers to run side by side the accounts depreciation, complicating matters further.

In its findings, the OTS concluded this alternative to the existing capital allowances system would be too onerous to implement and for now has proposed not taking the option any further.

  • Widening the scope of annual investment allowances (AIA).  Instead of claiming AIA against plant and machinery assets, the OTS proposed for taxpayers to offset the AIA (currently at £200,000) against all assets acquired by them (excluding land and residential dwellings).
  • Creation of a new Business Asset Pool. The OTS has proposed extending the scope of capital allowances by creating a new pool for all assets used by a business (excluding land and residential dwellings).  This will include assets currently not benefiting from any capital allowances tax savings.   A 2% rate against all such items would be cost neutral when reducing the general pool rate to 16% and special rate pool to 7%.

Conclusion

The OTS has effectively ruled out the accounts depreciation option, and the other options it proposes extend rather than fundamentally change the current system.

Therefore, for now, it is apparent there is no appetite for significant change.  The Treasury may decide to implement some minor amendments but it is unlikely that in the short term the accounts depreciation route will be implemented.

The OTS has looked at simplifying capital allowances a number of times over the last decade or so.  The current Brexit negotiations will be concentrating minds at The Treasury for a number of years to come and HMRC are unlikely to welcome further distractions.  Time will tell whether, once the Brexit dust has settled, HMRC and The Treasury look to implement any of the OTS recommendations.

Lovell Consulting Viewpoint

In our experience, many companies continue to under claim their capital allowances; either as a result of poor information or a lack of knowledge.  Providing the assets are still owned by the company, there is scope to claim any additional allowances due on old expenditure in current periods.

Going forwards, there would be more merit if HMRC could provide clarity on plant and machinery assets that are often challenged by Inspectors.  Assets such as demountable partitions and ambient expenditure that qualify for capital allowances by virtue of satisfying the legislation and are in accordance with case law but are regularly disputed by HMRC Inspectors.

Finally, there is merit in making it easier to claim capital allowances on second hand purchases where properties are acquired from receivers.  It is often impossible to satisfy the pooling requirements and S198 CAA2001 elections when property is acquired from such entities.  Any simplification measures implemented in such a situation would be welcomed.

Back to News

OTHER NEWS

Halloween

Capital Allowances Prevent Nightmare Tax Levels

Lovell Coffee Seminar November 2018

New Capital Allowances CPD Seminar Date

shutterstock_346345310

Capital Allowances Plant and Machinery in a Civil Engineering Context

Ho Ho

Lovell Consulting Capital Allowances Student Prize Winner 2018

The Lazarus Impact – Making Very Late Capital Allowances Claims

Capital Allowances within Commercial Sale and Purchase Contracts

john

OTS Review on Capital Allowances and Accounts Depreciation

EGA_220717_301_REV

20 Years of Capital Allowances

20170719_133055

Lovell Consulting Capital Allowances Student Prize Winner 2017

Pension Funds and Capital Allowances Interactions

lexis

Lexis Nexis Webinar – Capital Allowances in 2017

Capital Allowances and Demountable Partitions; To Move or Not to Move?

Employees Claiming Capital Allowances: Caravan Case Demonstrates Hurdles!

Capital Allowances, Corporation Tax Loss Relief & Interest Deductions – Act Now

Corporation Tax Loss Relief & Interest Deductions: Capital Allowances

Capital Allowances, Trustees and Tax Havens

Michael_Edwards_Portrait

Interview: A Little Capital Allowances Knowledge Can Be Dangerous

MBL Seminar Dates Announced (Capital Allowances in Retail, Hospitality & Offices)

new-picture-56

2016 Lovell Consulting Capital Allowances Art Prize Voting Begins

Capital Allowances in the Retail Sector

Free Cash, Tax Savings & Capital Allowances for SMEs Going Green

Student Accommodation & Capital Allowances

blake-h-portrait

Lovell Consulting Capital Allowances Student Prize Winner 2016

Capital Allowances within Offices

MBL Webinar

MBL Webinar – Capital Allowances for Property Surveyors

Capital Allowances & Data Centres

Tax Journal Interview: One minute with…John Lovell, Capital Allowances Specialist

Claiming Capital Allowances and / or Repairs

Commercial Property Standard Enquiries: Capital Allowances

New Picture (54)

LexisNexis Webinar – Tax for General Practice & Capital Allowances

Artful Plant: When Capital Allowances may be Claimed on a Painting

New Picture (44)

LexisNexis Webinar – Commercial Property Law & Capital Allowances

Thumbs_up_bluefilter

New Capital Allowances Team Appointment – Glenn Ramos

New Picture (48)

MBL Webinar for Property Lawyers and Tax Advisers (Capital Allowances)

Fundamental Changes to Interest Deductions & Impact for Capital Allowances

Capital Allowances within Childcare Facilities & Schools

John Lovell Comments: 2016 Budget – Impact on Capital Allowances: Commercial Property

Capital Allowances Team Announcements

Better Call Lovell for Capital Allowances

0928aa_ee33b990a61e441d83d6b257a590d366

Lovell Consulting Capital Allowances 2015 Art Prize

Lexis

LexisNexis Capital Allowances Webinar with John Lovell & Ronak Shah

Plant in Garden Centres: Claiming the Right Kind for Capital Allowances

Can an Accountant Claim the Capital Allowances without Specialist Support ?

John Lovell Capital Allowances talk at Chartered Institute of Taxation Conference

Enterprise Zones & Capital Allowances

Capital Allowances & Landlord Contributions to Tenant Fitting Out Works

10 Key Qualities To Look For In A Capital Allowances Advisor

Capital Allowances within Private Member Clubs

Effective Dealing with HMRC for Capital Allowances

Taxation Feedback Article

Taxation Feedback: Capital Allowances

Capital Allowances within Restaurants

Capital Allowances within Nursing Homes

Little Book

Little Book of Big Capital Allowances Savings

Real Estate Investment Trusts: Get The REIT Advice on Capital Allowances

Wind Turbines and Capital Allowances

Contaminated Land – The Big Clean Up for Capital Allowances

New Picture (20)

Capital Allowances & Furnished Holiday Lets

Capital Allowances Hidden Gems within Hotels

Helpful Tips for Claiming Capital Allowances in Tax Returns

Why Do I Need A Capital Allowances Specialist?

Land Remediation Relief & Capital Allowances Q&A

Inspired Capital Allowances Savings_Page_1

Inspired Capital Allowances Savings

Private Rented Sector (PRS) & Capital Allowances: Key Planning Points

Drafting For Purchase Contracts And CPSE Capital Allowances Responses

Lovell Consulting Capital Allowances Student Prize Winner 2015

Summer Budget 2015: Property Tax Updates & Impact for Capital Allowances

The Benefits of Claiming Annual Investment Allowances

LN

Lawyers Should Seek Specialist Capital Allowances Advice

Lovell_Consulting_Groups22-1500w

The New Environment For Capital Allowances

Capital Allowances – Demolition Costs

Capital Allowances – Asbestos Removal

Capital Allowances Case Summary: Bowerswood House Retirement Home

Property Tax Case Summary: Terrace Hill (Berkeley) Ltd: Impact for Capital Allowances

Business Premises Renovation Allowance (BPRA) Case Summary: Senex Investments

Construction Expenditure image

Capital Allowances Savings for Construction Expenditure

Recent Capital Allowances Case Study

Capital Allowances Case Summary – Rogate Services

Lovell Consulting Capital Allowances Student Prize Winner

Capital Allowances Case Summary – LLPs and AIA

Kirsty and Mike 2

New Capital Allowances Team Members

See Saw 2-10 (2)

Lovell Consulting Capital Allowances 2014 Art Prize

EGA_030514_301.indd

Recent Lovell Consulting Press Coverage: Capital Allowances

Lovell_Consulting_Groups05

April 2014 Capital Allowances Fixtures Rules

The Budget of 19 March 2014 Announced a Number of Capital Allowances Changes

Lovell_Consulting_Groups22-1500w

Capital Allowances Case Update – The Granleys

Holiday Lets 2

Capital Allowances on Furnished Holiday Lets

Capital Allowances Case Update – Wetherspoon

The Budget of 23 March 2012 Announced a Number of Capital Allowances Changes