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ICAEW calls for more innovative thinking on capital allowances reform

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Published: 05 Jul 2022 Update History

In its response to HM Treasury’s policy paper on options for reforming plant and machinery allowances, ICAEW’s Tax Faculty sets out ideas to make the regime more targeted and to help the government meet its other policy objectives.

In its policy paper, HM Treasury set out five options for making the capital allowances regime more generous. Views were sought on which option could provide the greatest incentive for businesses to invest in capital infrastructure and equipment.

The faculty sought views from members, who overwhelmingly saw the current capital allowances regime as providing a reward for capital investment, rather than an incentive. In its response, the faculty highlighted that bringing forward the timing of the financial benefit would help to produce a more incentivising regime. For example, by providing grants for planned investment projects, or providing repayable tax credits, especially for loss-making companies.

It also considered that, by providing tax incentives for specific forms of expenditure, the regime could provide more incentives at a lower cost to the Exchequer. The response also looked at:

Who?

Is the government looking to incentivise large-scale infrastructure projects or help small businesses to grow? These markets will respond to very different incentives.

What?

Is the government looking to do more to incentivise businesses to invest in environmentally friendly equipment as part of its net zero agenda? Could investment in advanced technologies assist with this, as well as enhance productivity?

Where?

Is the government considering the use of enterprise zones outside of the South East of England to assist with its levelling up agenda? What about brownfield sites or ailing high streets?

The response highlighted the need to re-examine the boundaries around what constitutes expenditure on capital equipment. Planning and project management costs relating to large-scale capital investment projects, for example, frequently attract no tax deductions at all. They are capital in nature, but do not constitute expenditure on plant or buildings. This can reduce the incentives available for such projects.

The final theme arising from the response was the need for greater certainty and consistency in the government’s capital allowances policy. It notes, for example, that the annual investment allowance has changed six times since its introduction in 2008. Rates of writing down allowances available in respect of plant and machinery pools have also frequently changed. Keeping rates and rules unchanged for a sustained period would help businesses to understand what allowances are available to them when planning investment projects.

Read ICAEW REP 54/22 in full.

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