Capital Allowances Reformed

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A temporary boost in the annual investment allowance, as well as the super deduction, will be phased off in March 2023. The government is currently soliciting views on how to enhance and reform the system of capital allowances. What’s in store for the future?

A fresh request for evidence has been issued by the government in an attempt to elicit input on potential views on capital allowances. You have till July 1st to react if you choose to do so. Any final conclusions will very certainly be disclosed in this year’s Autumn Budget. So, what are the proposals being looked at? Let me give you a quick rundown:

  • Annual investment allowance permanent increase;  
  • The policy document suggests raising the rates at which allowances are written off by 20% and by 8% for the main pool and the special rate pool, respectively.
  • Increased relief with the inclusion of a first-year allowance (FYA). For example, if a new machine is acquired for £10,000, the extra FYA might yield a tax relief of 20 percent (£2,000) in the first year. The whole £10,000 would be written off at the standard rate throughout the course of the machine’s lifespan.
  • There is also the option of instituting a 50% first-year allowance for special rate plant and machinery and a full expensing allowance for main rate plant and machinery. There would be no annual restriction on the amount claimed.

If the latter option is adopted, it would need a dramatic revamp of the present system. The annual investment allowance, on the other hand, normally allows small firms to claim a relief deduction for 100% of their investments.

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