The Office of Tax Simplification has today published its report – “Accounting Depreciation or Capital Allowances?”. The conclusion – Capital Allowances are here to stay.

There are three key messages:

  1. A depreciation based tax system would be technically difficult to implement, especially during a transition phase
  2. Capital Allowances are a fair and robust form of investment tax relief
  3. Removing fiscal responsibility from Governments and placing it with accounting bodies would be politically impractical

Capital Allowances are the UK’s primary method for obtaining tax relief on capital expenditure. Replacing it with accounting depreciation would be unique; nowhere in the world is such a tax relief policy implemented. Singapore and Malaysia continue to operate Capital Allowances systems, while America and much of mainland Europe operate an accelerated depreciation policy dependent on asset and investment type. Nonetheless, having existed since 1945, Capital Allowances were a prime target for review as part of the trend towards aligning accounting and tax principles.

Whilst the OTS’s honest intent to replace Capital Allowances with a system felt to be more egalitarian may have been understandable, the results of their own review probably came as a shock to the authors. They have found that the transition to a new tax system be fiendishly difficult, while significant falls in tax revenues and loss of control over fiscal policy would undoubtedly prove unpalatable to the Treasury.

Grant Thornton have long held the belief that Capital Allowances represents a fair method to encourage investment. Landlords invest heavily in UK property, and a depreciation based system as proposed by the OTS not only removed tax relief from property investors, but added tax charges as and when property is revalued. It should not be underestimated how much investment is required by landlords to get commercial property to a lettable standard, especially in the current environment where we see occupiers demanding more flexible and dynamic workspaces. 

It was also recognised that Capital Allowances benefits smaller and medium sized businesses through administrative simplification and cashflow benefits of the £200,000 Annual Investment Allowance (AIA). The AIA was particularly praised in the review, with recommendations made for further progress to simplify Capital Allowances, widening its scope to include expenditure on all business assets without the need for any kind of segregation exercise.

All of this adds up to a resounding endorsement for the UK’s Capital Allowances system. Capital Allowances are a real force for good, encouraging and rewarding investment, particularly in energy-efficient and green technology. The final report is a result of months of research, with input from Grant Thornton’s leading Capital Allowances specialists. We see this review resulting in improvements to the Capital Allowances regime and giving business a green light to continue investing in and improving UK property.