Full expensing a ‘welcome simplification’

The Chartered Institute of Taxation (CIOT) has welcomed the announcement that the Government will introduce full capital expensing, but said that doing so for just three years initially will create some uncertainty for business which is unwelcome.

In his Budget statement today the Chancellor said he would introduce: “Full capital expensing for the next three years with an intention to make it permanent as soon as we can afford to do so”.

Adrian Rudd, Chair of the CIOT’s Corporate Taxes Committee commented:

“As well as increasing incentives for business, full expensing will be a welcome simplification.

“It gives the greatest simplification to the business tax system out of all the options considered by the Government in their consultation last year[1].

“Under full expensing it will still be necessary to use case law to distinguish between plant and machinery (included) and buildings (not included). But if an item is considered to be plant, it will not be necessary to determine whether the expenditure on it is capital or revenue. This will create benefits for businesses, advisers and HMRC.

“Investments that were previously not profitable can become profitable under full expensing, due to the reduction in the cost of capital. However, the extent to which it will incentivise investment is hard to predict, especially if business does not believe that it will last.

“This is why making the change for just a three year initial period is unhelpful. It is not clear why the Government thinks that it may not be affordable in three years when it is now.”

The Chancellor also made a number of announcements on research and development (R&D) tax credits, including:

1. From 1 April 2023, a higher rate of relief for loss-making R&D intensive SMEs will be introduced

2.  No decision yet on merging the R&D Expenditure Credit (RDEC) and SME schemes but the Government will publish draft legislation on a merged scheme for technical consultation in the summer and will keep open the option of implementing a merged scheme from April 2024.

David O’Keeffe, Chair of the CIOT’s R&D Working Group commented:

“The Government says that it has not yet decided whether to merge the two different R&D schemes but the promise of draft legislation in the summer suggests its mind is already made up.

“If a merged scheme comes in in April 2024 then the higher rate for loss-making R&D intensive SMEs will only have been in place for one year, unless the Government maintains the higher rate in a merged scheme.

“It suggests that debate will be required around the trade-off between the potential simplification of a merged scheme and policy decisions to provide additional support to SMEs (or some of them) through different rates of relief. This debate, as well as other details considered in the consultation on a merged scheme which only closed on Monday[2], suggest that the proposed timetable of 1 April 2024 is overly ambitious.

“Merger of the two schemes would be a simplification but only if it happens at a single rate.”