The last consultation was led by the Office for Taxation Simplification, and resulted in the introduction of Structures and Buildings Allowances – widely criticised as one of the most (ironically) complex, convoluted and badly-implemented tax policies in living memory, and with very little actual cash incentive to make the effort of claiming worthwhile.
Claritas Tax will be submitting a considered response to this latest consultation in due course. In the meantime, please do feel free to feedback some of your thoughts about how the UK should recontour its fiscal incentives landscape.
Here are some of my initial thoughts:
Capital Allowances give tax relief over a number of years based on the original purchase price of a qualifying asset.
It’s easy to overlook the way inflation erodes the benefit of the allowances. In fact, Mexico is currently the only OECD country that adjusts Capital Allowances for inflation.
With inflation forecast to hit 10% this year, its highest level for forty years, by failing to account for the time value of money the UK’s regime understates true business costs and in effect taxes profits that don’t exist.
In a post-Brexit world we can’t ignore the relevance of international competitiveness to the UK’s tax regime.
Following the OECD deal to impose a global minimum corporate tax rate of 15% from 2023, I think we’ll see agile and entrepreneurial countries shifting the focus of their Corporation Tax policy from tax rate to tax base.
Tax base is a less tabloid-friendly concept but shares equal importance with a country’s headline tax rate in determining the overall tax drag on the economy, and therefore the total amount of cash flowing into the Treasury’s coffers.
The UK’s temporary Super-Deduction was designed to offset the coming increase in Corporation Tax rate, but as such it is scheduled to expire at the end of March 2023. A recent study by the Tax Foundation found that if the Super-Deduction is allowed to expire as scheduled, the UK drops from 5th in OECD countries to 30th (of 38) in terms of NPV-adjusted capital cost recovery.
Capital Allowances will soon find themselves on the front line of the global battle to attract inward foreign investment.
The last few decades have seen a general downward trend in both Corporation Tax rate and the value of Capital Allowances. At a macro level this has contributed to the UK’s shift away from capital-intensive industries and towards a knowledge economy significantly dependent on imported goods and materials.
We’ve seen the resilience of global supply chains repeatedly stress tested in recent years, with Brexit, Coronavirus, the war in Ukraine and even a container ship wedged in the Suez Canal all serving to underline the strategic importance of at least some level of national self-reliance.
Perhaps I’m naively optimistic to hope that our elected representatives will raise their eyes to the horizon and paint a sweeping and visionary picture of a reengineered UK economy; I’m probably even more delusional to suggest that this review of Capital Allowances is the ideal starting point, but we have to start somewhere, right?
The recently-departed Enhanced Capital Allowances scheme showed that policy makers do have an understanding of the distortionary effect of Capital Allowances.
This admin-heavy distortion should be replaced with increased permanent Capital Allowances. Against a background of record high energy costs, and in concert with tightening environmental standards, payback periods will be shortened. The business case for replacing old machinery with new energy-efficient equipment will be easier to make when reduced running costs are set alongside lower post-tax capital cost.
While businesses will always welcome temporary tax give-aways, they lead at best to a short-term boost in investment. It’s more likely that future investments are simply brought forward but the overall level of investment is not permanently raised.
We’ve seen endless tinkering with the Annual Investment Allowance, which of late has been given several consecutive stays of execution. The 130% Super-Deduction is just a short-term fudge to remove a disincentive to invest ahead of a hike in the Corporation Tax rate. Neither of these do anything to foster long-term investment strategy and strategic investment decisions.
Investment decisions about assets that may have a payback period measured in decades are based on financial models that rely on a confident expectation of future tax policy.
Above all else, taxpayers value certainty and predictability.
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