Capital Allowances review needs to avoid a flawed ‘one size fits all’ solution

Ahead of the scheduled ending of the Corporation Tax Super Deduction scheme at the end of March 2023, the Treasury’s Spring Statement published today includes illustrations of potential reforms to capital allowances available to businesses which incur qualifying capital expenditure. These include increasing the permanent Annual Investment Allowance (AIA) (from £200,000 to £500,000), increasing the rate of Writing Down Allowances, two possible ways to provide greater up-front tax relief on expenditure and the significantly more expensive option of allowing businesses to write off the whole cost of qualifying investment in one go.

Michael Steed, Co-chair of ATT’s Technical Steering Group, said:

“This proposed engagement of the Government with businesses and other stakeholders has the potential to create a stable system of capital allowances which encourages investment, meets the varying needs of different types and size of businesses and is easier to understand. That objective is only achievable if the discussion involves a wide range of stakeholders and the discussion itself is wide-ranging.

“The current capital allowances system is confusing. Too much depends on the precise timing of expenditure, fine statutory distinctions between similar types of asset and the nature and structure of a particular business. It is also subject to frequent changes, making decisions on expenditure more complex.

“As an example, the temporarily increased Annual Investment Allowance – designed to encourage capital investment - can, in some circumstances, restrict tax relief on expenditure which would have been fully relieved under the lower permanent AIA level of £200,000.  

“We think there is a real opportunity to rationalise the capital allowance system to increase its effectiveness, make it more intuitive and provide a stable and well understood structure that works for businesses of all sizes and type. What we must avoid is a ‘one size fits all’ solution which fails to address the varying needs of different businesses."

Notes for editors

1. Extract from Chancellor’s speech:

“Third, capital.

Weak private sector investment is a longstanding cause of our productivity gap internationally:

Capital investment by UK businesses is considerably lower than the OECD average of 14%.

And it accounts for fully half our productivity gap with France and Germany.

Once the Super Deduction ends next year, our overall tax treatment for capital investment will be far less generous than other advanced economies.

We’re going to fix that.

In the Autumn Budget, we will cut the tax rates on business investment.

And I look forward to discussing the best way to do that with businesses.”

2. The Super Deduction enables an unlimited amount of qualifying capital expenditure incurred by a company (but not an unincorporated business) in the two-year period ending on 31 March 2023 to attract Corporation Tax relief at 19% on 130% of the actual expenditure. The purpose of the Super Deduction is to discourage companies from delaying their capital investment until after 31 March 2023 when the rate of Corporation Tax relief on that expenditure increases to 25%. [19% on 130% of actual cost = 24.7% which approximates closely to 25%.]  

3. See the Treasury’s Spring Statement 2022, sections 4.20 to 4.34 and particularly sections 4.32 to 4.34.



4. For more detail on the potentially surprising  impact of the temporarily increased AIA, please see this ATT Press Release of 27 October 2021