Relief for Investors - OTS Review in Favour of Keeping Capital Allowances

The OTS’s July 2017 report on the corporation tax computation recommended that accounts depreciation should be explored as a way of giving tax relief for tangible fixed assets. The OTS published a scoping document in September 2017 and launched its call for evidence in October.



Overall, the report concludes that despite the ‘undoubted’ long-term benefits of a move to accounts depreciation, these would not be enough to make the disruption of such a ‘radical’ change worthwhile. It would require lengthy transition periods and involve all businesses, even though only around 30,000 businesses claim capital allowances above the present annual investment allowance of £200,000. Responses to the call for evidence were not supportive of the idea.


The OTS believes there is considerable potential to simplify capital allowances, taking a combination of the recommendations outlined in the corporation tax review and three further areas outlined in the latest report. If that can be done, the OTS sees ‘no conclusive case’ in favour of using depreciation.


The report recommends three new structural changes to the capital allowances regime:

  • Widen the scope of the annual investment allowance (AIA): For businesses investing less than the AIA limit, this would extend the AIA to all assets acquired for the business (excluding the usual categories of land and dwellings) without the need for further categorisation. This extension should apply to all business taxpayers, removing the complication of boundaries and thresholds. Businesses spending above the AIA limit may need to distinguish between assets falling within the AIA and those outside. HMRC estimates the cost of an extended AIA would be less than £5bn (compared with the current cost of £2.5bn).


  • Widen the scope of capital allowances (CAs) generally (full scope CAs):Widening the CA regime to encompass all assets used in a business would require the creation of an additional pool for new business assets (excluding land or dwellings) which do not qualify under any of the existing CA provisions, written down at a prescribed rate. HMRC estimates that a 2% flat rate allowance for assets which do not at present qualify for CAs would be cost neutral if the main 18% rate was reduced to 16% and the special 8% rate was reduced to 7%. A greater reduction in other rates may be necessary to achieve neutrality in the longer term. 


  • Accounts-based CAs (if the scope of CAs cannot be widened): This would use the categorisation and lives determined for the accounts. There would be pools for the accounting categories, with writing down allowances given for each pool. Assets such as land and dwellings would remain unrelieved. Benefits of this approach would include simplification of boundary issues and removal of the need to reclassify assets for tax.

Within the accounts-based option, three alternative approaches are suggested:

  • applying a writing-down rate to the asset types in the accounts;

  • applying a writing-down rate taking account of asset lives, as well as asset types; or

  • applying a writing-down rate based solely on asset lives.

The report notes that the last of these alternatives, based solely on asset lives, may become more appropriate in the future, ‘where asset descriptions are likely to become more difficult to interpret as tangible and intangible assets morph’.


Other recommendations for administrative changes follow those set out in the 2017 corporation tax report, involving:

  • clearly stated policy objectives for changes to the CA regime;

  • using the capital/revenue distinction in accounts (to reduce the burden of having to analyse capital expenditure for tax purposes);