The Chartered Institute of Taxation has commented on the OTS’ publication of its Accounting depreciation or capital allowances? Simplifying tax relief for tangible fixed assets report.
Taxpayers cannot generally claim tax relief for the deprecation of the physical capital assets they use in their businesses. The capital allowances regime provides businesses with tax relief on specified tangible asset capital expenditure by allowing prescribed amounts to be deducted against their annual taxable profits. The use of accounts depreciation in place of capital allowances has been put forward as a radical simplification. The OTS has recommended further consideration of less radical options.
John Cullinane, CIOT Tax Policy Director, said:
“Most of the compliance burdens of the capital allowance regime come from having to classify assets for capital allowances purposes in a way that is not required for accounting purposes. This could largely be removed by using accounts classifications to determine which capital allowance pool or rate applies. This would not entail as many difficulties as a full blown reform to depreciation.
”We accept that the choice of a less radical and principled solution is evidence based, but the Government absolutely should on this basis proceed with the less radical option to deliver a lot of the benefits with not so much pain.
“If the practical outcome of all this is that even the less radical solution gets lost from view, it does not really bode well for any attempt to simplify any legislation. It is hard to see moving to accounts based capital allowances as politically controversial, particular with the strong recommendation to preserve the Annual Investment Allowance which is particularly beneficial for small businesses who can end up fully deferring tax if they reinvest sufficient profits in qualifying assets.”
In the summary and findings of the report, the OTS said replacing capital allowance with depreciation would be a radical change but it could be done. However, it says it is not clear that it should be done. The long term benefits it would deliver would not be enough to make the disruption worthwhile. However, nothing in its review has made the structure of the capital allowance regime seem simple. It is complicated and at times unfair as between different businesses, the report says. The only benefit of the way that tax relief is currently given is that it exists already and some people are familiar with it. The capital allowance system should be improved, says the OTS. Ways of achieving this are set out in the report. Some can happen quickly, others will take longer to implement, it says.
Notes for editors:
- The OTS’ report can be found here.