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The Office of Tax Simplification (OTS) report on simplifying tax relief for fixed assets

The Office of Tax Simplification (OTS) report on..

The OTS embarked upon a study to explore the potential of replacing capital allowances with accounts based depreciation.

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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 capital allowances regime is well understood, but not perfect in terms of fairness and time consuming to administer for business;
  • An accounts based allowable depreciation system is achievable, and there was evidence from around the world that such a system was attractive, simple and workable for tax authorities and businesses alike; and
  • There would be a significant transitional period that would mean the capital allowances and newly designed allowable depreciation would run in parallel whilst relief was given for historic expenditure.

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:

  • Widen the scope of the Annual Investment Allowance (AIA) to include assets that currently do not qualify for capital allowances such as buildings (but this will not include land or dwellings); and
  • Reform the current capital allowances system to remove boundary issues or to adopt some of the positive features of a depreciation based system.

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.

For further information please contact:

Harinder Soor

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