The OTS embarked upon a study to explore the potential of replacing capital allowances with accounts based depreciation.
After a lengthy consultation with the business community the OTS has concluded that replacing the current capital allowances regime with an accounts based depreciation is not a viable option for now. It reasons that the benefits would be outweighed by the costs of upheaval of the current system. The OTS acknowledges that, based on data provided by HMRC, moving to accounts based depreciation would cost an extra £7 billion per year.
It is hard not to feel a sense of anti-climax at the OTS conclusions published last week. The last time this sort of review was carried out by Government was pre the OTS, in 2002/03. The conclusions then, as now, were:
The findings from the 2002/03 review were not followed up and the worry is that the OTS’ latest report will follow the same pattern. The OTS’ intentions were clear around simplification but the challenges they have now highlighted and the conclusion reached should not be a surprise to business, advisors and HMRC. The OTS has recommended further work is done to:
The further work could yield benefits to the business community that would be welcomed. The limit of the AIA of £200,000 means the main beneficiaries to this tax relief are in the small and medium sized sector – any improvements to this regime will mean this vital sector will be further supported.
The reform of capital allowances to adopt some of the characteristics of deprecation is a very interesting development and the OTS does provide some examples on how it sees it working. This will need testing with the business community but could be an exciting step forward in the development of a regime that gives tax relief on a broader asset base.
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