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Is it time for a rethink of the capital allowances system?

The capital allowances rules set the rates and timing at which capital expenditure can be deducted to arrive at taxable profits in a tax return. Announced on 9 May 2022, the UK government is considering reforms to help with enterprise and growth. The 2022 Spring Statement previously set out some types of changes that could be made including:

  • Increasing the Annual Investment Allowance permanently to (for example) £500,000.
  • Increasing main pool and special rate allowances from 18% and 6% to (for example) 20% and 8%.
  • Introducing a first-year allowance for main pool and special rate pool of (for example)  40% and 13%.
  • Extending the super-deduction beyond 1 April 2023 (for example: an additional capital allowance of 20% over and above the initial cost).
  • Introducing the ability to write off costs of qualifying investment in one go (which would be the costliest measure to implement, as it would allow all qualifying expenditure to be written off in the first year and noting that no other country in the G7 has implemented this on a permanent basis).
  • Improving the Structures and Buildings Allowances and Freeports allowances. 

When made later this year, any Budget announcements on capital allowances will take into account the latest economic and fiscal position.

The government has requested written responses focused on:

Investment decisions

How businesses make investment decisions, the relative importance of capital allowances in those decisions, and how they are taken into account (e.g. net present values, cash-flow benefits or impacts on effective tax rates).

Number 2

The super-deduction

How has the super-deduction affected investment decisions.

Number 3

The current system of capital allowances

How far do capital allowances rates influences decisions by multinationals on which territory to invest in. How simple is the current system to understand and operate and does it provide adequate support for investment.

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Who should respond?

Responses should be submitted to HMRC by 5pm on Friday 1 July 2022 and HMRC are interested in hearing from any interested stakeholder.

If you would like more information on capital allowances or to discuss your thoughts on this announcement please get in touch with your usual Menzies contact or one of our capital allowances team.

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