OTS review of capital allowances - KPMG United Kingdom
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OTS review of capital allowances

OTS review of capital allowances

The document sets out the OTS’s planned review into replacing capital allowances with a deduction for accounts depreciation.


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Following a recommendation made in the Office of Tax Simplification (OTS) review on simplifying the corporation tax computation, which was published in July, the OTS has now published the scoping document for its anticipated review of capital allowances as requested by the Chancellor. The document sets out the terms of the OTS’s review to explore the impact and challenges of replacing capital allowances with accounts depreciation as the means of giving tax relief for investment in tangible assets.

During the OTS’s corporation tax computation review, capital allowances were consistently highlighted by businesses and tax professionals as an area of high complexity, with uncertainty around identifying qualifying assets and a disproportionate administrative burden in relation to the value of the tax relief claims. Comments were also made that the capital allowances rules did not always align with the commercial reality of the accounts.

The document proposes the replacement of capital allowances with a deduction for accounts depreciation which would align the tax and accounting positions and remove the need for separate calculations. The review will look at the nature and potential impact of such a change, including:

  • The nature of accounts depreciation and the role of judgement in its quantification;
  • The current practices of companies in deciding on rates of depreciation and typical rates used for different types of assets;
  • The industry/sectoral impact of adopting accounts depreciation and whether this impact varies on region or size of a company;
  • The potential to mirror the effect or accommodate certain existing tax reliefs (such as the Annual Investment Allowance) within an accounts depreciation model;
  • The legislative, administrative and exchequer impacts of the options proposed, including in response to avoidance risks;
  • The transition arrangements required to move to a new system and their impact;
  • To what extent the proposed changes would impact unincorporated taxpayers;
  • The impact on the administration burdens on business and the operational impact on HMRC; and
  • International considerations and comparisons.

As reported in Tax Matters Digest at the time of the OTS July 2017 review publication, the OTS is considering a potentially radical approach to simplification. The OTS July 2017 review acknowledged that utilising an accounts based approach has been suggested before (2002). The difficulties of changing to this approach from capital allowances, with the inherent workarounds that will be needed, to factor in different stakeholder demands (e.g. HMRC, HMT and different sectors with a heavy capital base) make this a very challenging prospect. The OTS further review seeks to determine whether these complexities can be negotiated without creating a comparably complex regime.

The OTS plans to release its report in Spring 2018.

For further information please contact:

Harinder Soor

Darren Barker



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