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BPF reaction to changes in corporation tax/capital allowances

Today’s announcement by the new government has confirmed plans to increase CGT and less clear plans in the Tory manifesto set out changes to corporation tax as well, paid for with a cut in capital allowances.

Peter Cosmetatos, director of finance policy, for the British Property Federation, said:

“Capital allowances support investment, which is otherwise tax disadvantaged, and which is a vital component of economic growth and recovery – at this stage in the economic cycle, it would make more sense to be extending them than restricting them

“Certain capital allowances (enhanced capital allowances (ECAs)) are specifically designed to support ‘green’ investment, but we and others have pointed out that they should be extended and simplified if they are to help deliver the substantial reductions in carbon emissions from commercial buildings that the UK needs – any move to restrict them would instead make emissions reductions even more difficult

“Any restriction of allowances used by the property industry must – like any restriction of interest deductibility – be considered very carefully against the mandatory distribution requirement for Reits - which was originally designed in an environment where 25% writing down allowances were available for most qualifying plant and machinery.

The Tories appear to have two primary concerns:

• they are concerned that the headline rate of corporation tax (CT) is too high, comparing unfavourably with the corporate tax rates of other OECD countries and giving rise to complexity and tax avoidance; and

• they believe that the UK tax system currently favours debt finance over equity and are keen to rebalance it to discourage excessive reliance on debt.

Proposals

The Tories are proposing “initially” to reduce the main CT rate from 28% to 25% (with a corresponding drop in the small companies’ rate), and to pay for that “by reducing complex reliefs and allowances”. That reference (taken from the Tories’ election manifesto) is understood to be to capital allowances, but it may also refer to tax relief for interest costs, which has been much talked about but is not otherwise mentioned in the manifesto.

The Tories have indicated their intention to consult fully on how interest deductibility might be restricted, so that may be linked instead to a subsequent, further reduction in the headline CT rate (intended to give the UK “the most competitive tax system in the G20 within five years”). It is not clear whether they would also consult about changes to capital allowances.

No detail is currently available to flesh out precisely what the Tories might do in either of these areas, but it has been suggested that capital allowances should more closely reflect accounts depreciation, and that tax depreciation would be slower rather than being restricted completely. On debt, they have said that they would restrict, but not abolish, interest deductibility.

Given the property industry’s extensive use of both capital allowances and debt, it is likely that property businesses would be among the losers should these proposals be taken forward, even if the proposals are revenue neutral overall. Both measures could also have a disproportionate impact on the UK’s REITs – principally through their distribution obligations rather than in terms of actual tax – if care is not taken in their implementation.

Reactions – debt proposals

The British Private Equity and Venture Capital Association (BVCA) commissioned KPMG to carry out some research and produce a paper challenging the case for restricting interest deductibility – which might pose an almost existential threat to the private equity industry. Certain other organisations (including the CBI, Finance & Leasing Association (FLA) and BPF) also provided suggestions and input for that paper.

Excessive use of debt finance was yesterday’s problem, not today’s or tomorrow’s: the real problems facing businesses now are the difficulty of obtaining new debt finance which is needed to unlock investment and economic growth; and the difficulty of servicing and refinancing existing debt. The restriction of interest deductibility could make those problems much worse.

For more information contact Andrew Teacher, 020 7802 0113  end_of_the_skype_highlighting (direct) or 07968 12 4545 end_of_the_skype_highlighting or ateacher@bpf.org.uk