Future of capital allowances up for OTS review

The Office of Tax Simplification (OTS) is to review options for replacing the current capital allowances tax relief system with an accounts depreciation approach as the current model is too complicated and expensive for businesses to administer, reports Sara White

Capital allowances are viewed as one of the most complex areas of business taxes and came in for harsh criticism from businesses and tax advisers as the current system is too fluid and does not give strict rules for use of the tax reliefs.

One of the main criticisms is the complexity, particularly ‘the uncertainty around the “boundaries”, for example, working out whether an asset qualified or not or which writing down rate should be applied’.

There is a also a disproportionate administrative burden in classifying assets when claims are made, in relation to the value of the tax relief, raising costs for business.

The review will consider whether it is feasible to replace the current capital allowances system with a depreciation based system.

In the scoping document, the OTS said: ‘The use of accounting depreciation instead of capital allowances would be dependent upon resolving a number of significant issues arising from the change, including the potential for fiscal cost, avoidance opportunities and likely winners and losers.’

The work will need to set out who might be better off or worse off (‘gainers and losers’), including ways in which such a change could be made revenue-neutral, and the benefits and challenges involved including implementation and transitional issues. The work will also take into account options for different businesses defined by size and sector.

Corporation tax is a tax on net profit rather than turnover and allows relevant expenditure to be deducted. Both for accounting purposes and for corporation tax, capital expenditure on tangible assets is not deducted as the expenditure is incurred but, rather, over time - to reflect the way in which the value of the asset will fall over time.

However, while in accounts the expense is recognised in the form of depreciation, for tax purposes companies obtain relief in the form of capital allowances.

The OTS aims to publish a report in spring 2018.

OTS Capital allowances and depreciation scoping document

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