CIOT says stability in investment reliefs is key

The views are set out in CIOT’s response to a government consultation¹ on potential reforms to the UK’s capital allowance regime announced in the 2022 Spring Statement.²

Adrian Rudd, Chair of CIOT’s Corporate Taxes Committee, said:

“We need an end to the chopping and changing of reliefs for business investment. This will bring stability to the tax system and provide a sustainably supportive treatment of business capital investment for business income and corporation tax purposes.

“There is consensus across the political spectrum, including both Conservative leadership contenders, that the key to the UK’s economic future is generating growth, and that creating the right conditions for businesses to invest is central to delivering that growth.

“The overwhelming feedback that we have received from business and their tax advisers is that, when making investment decisions, stability and certainty are more important to them than the particular rate of relief.

“We encourage the Government to consider their longer-term strategy in relation to business investment and capital allowances. This review should include a wider, more strategic consideration around which businesses and what investment by those businesses it wishes to encourage. The resulting changes should have clear policy aims around what is incentivised.

“A wider review also provides an opportunity for the Government to ensure that capital allowances are given to assets and expenditure that will achieve the Government’s broader policies, such as levelling up, reduction in CO2 and energy efficiency (net zero), promoting innovation and high tech (high productivity) R&D industries, or improved and increased house building.”

On what will help businesses, the CIOT suggests the Government considers the following:

• Re-setting a permanent level of the Annual Investment Allowance (AIA) at an appropriate level to simplify the tax and capital allowances computations of businesses within its limits.
• Broadening the expenditure that qualifies for the AIA to provide further simplification for smaller businesses.
• Simplifying the capital allowances regime more generally, as this will be at least as attractive, if not more so, than higher tax incentives and reliefs.
• Ensuring changes are made for the medium to long term to generate business confidence.
  Adrian Rudd added:
  
  “The Government could also consider other tools to make the capital allowances regime more attractive and better incentivise companies to purchase, upgrade, or extend the life of an asset.
  
  “For example, the Government could consider introducing some form of ‘above the line relief’,³ upfront grants or subsidies for particular types of expenditure and an ability for loss making companies to surrender allowances for a payable tax credit, similar to the SME R&D tax relief scheme.”
  
  On whether a full expensing is a worthwhile potential policy, Adrian Rudd said:
  
  “Full expensing would undoubtedly be costly to the Exchequer, but it is an interesting proposition to consider. We do not know whether this option would have the effect of incentivising investment to any great extent. It also lacks the ability to target incentivisation at investment in line with the Government’s overall policy objectives.”
  
  Notes for editors
  
  1. The Chartered Institute of Taxation (CIOT) have responded to the HMT invitation for views on Potential Reforms to UK's Capital Allowance Regime.
  
  2. The suggested reforms include increasing the permanent level of the Annual Investment Allowance (AIA) – which allows most businesses to deduct the full amount of qualifying plant and machinery expenditure up to a set level to arrive at taxable profits, increasing the rates of Writing Down Allowances (WDAs) which give tax relief for plant and machinery not covered by the AIA, introducing general First-Year Allowances (FYAs) for qualifying expenditure on plant and machinery, introducing an additional FYA and/or introducing permanent full expensing, which would allow all qualifying expenditure to be deducted in full as it arises.
  
  3. In accounting, ‘above the line’ refers to anything that is deducted in getting to the profit / loss of a company, whereas below the line is anything that does not affect the profit (e.g. dividends paid out). We have received consistent feedback from businesses that tax relief would be a greater incentive within investment decision making if the relief were ‘above the line’, to impact earnings before interest, taxes, depreciation, and amortization – similar to the Research and Development Expenditure Credit (RDEC).
  
  RDEC can also be claimed by small and medium-sized enterprises (SMEs) who have been subcontracted to do research and development (R&D) work by a large company or who have received a grant or subsidy for their R&D project. You might do this as an SME if you cannot claim R&D tax relief for SMEs. The credit is calculated at 13 per cent of your company’s qualifying R&D expenditure (this rate applies to expenditure incurred on or after 1 April 2020) and is taxable. Depending on whether your company is profit or loss making the credit may be used to discharge the liability or result in a cash payment.
  
  The accounting treatment for R&D tax credits in the SME scheme is straightforward: R&D tax credits are non-taxable and therefore only affect your tax charge. For RDEC claims, the credit can be recognised above the line in the accounts, having a positive impact on your profit-before-tax.