HMRC research on capital allowance claims

UK businesses are currently grappling with various headwinds including inflationary pressures, high interest rates, and increased employment costs. In such an environment, they may wish to maximise their use of capital allowances to help manage cash flow more effectively and mitigate the risks associated with large capital outlays.

Capital allowances, which allow businesses to deduct the cost of qualifying capital expenditure from their taxable profits are not just a fiscal tool, they incentivise business investment, contributing to productivity and innovation.

Research commissioned by HMRC underscores the role capital allowances play in shaping business investment decisions.

The study found that capital allowances influence the timing and scale of investments, particularly in plant and machinery. The research found that the introduction of the super deduction, which provided relief at 130% for qualifying expenditure incurred between 1 April 2021 and 31 March 2023, influenced the investment behaviour of 19% of surveyed businesses in 2021/22, and 29% of surveyed businesses in 2022/23. The introduction of the super deduction resulted in these businesses making investments earlier than previously planned, investing a higher amount than planned, or making investments that would otherwise not have been made.

Capital allowances reduce the effective cost of investment, making it more feasible for businesses to upgrade equipment, adopt new technologies, and expand operations, which is especially critical in the current economic climate.

Moreover, the introduction of more generous schemes, such as full expensing for qualifying investments, has amplified the impact of capital allowances.

These measures not only incentivise immediate investment, but also align with broader government goals of boosting productivity and transitioning to a greener, more digital economy. But could the government do more?

The HMRC research also highlights that awareness and understanding of capital allowances varies across sectors and business sizes. This suggests a need for improved certainty, communication and guidance to ensure that all businesses can fully benefit from these incentives.

As the UK seeks to reboot and future-proof its economy, capital allowances should be viewed not merely as a tax relief, but as a way to stimulate business investment. By encouraging investment in assets that enhance efficiency and competitiveness, they contribute to economic resilience and growth.

A key component of this is long-term certainty. The government’s commitment to maintaining a stable capital allowances regime throughout the term of this parliament is to be applauded. However, this commitment is not always reflected in HMRC’s actions.

HMRC recently applied for permission to appeal to the Supreme Court, a key tax case we have written about previously (Orsted West of Duddon Sands (UK) Limited (also known as Gunfleet Sands Limited)). This judgment found that certain early-stage design costs were eligible for capital allowances. By seeking to overturn this ruling, HMRC seems to be at odds with the government’s stated policy aims of increasing capital spend by businesses and making the UK an attractive place to invest.

Capital allowances are more than a line item on a business’s tax return, they contribute to business confidence, innovation, and national prosperity. Ensuring their continued relevance and accessibility should form part of the government’s mission to unlock the UK’s full economic potential. However, the government must do more to provide clearer guidance for smaller businesses, but also certainty for larger scale investment.