Capital Allowances (Full Expensing and Debt Financing Reform) Bill

A

Bill

To

allow a 100% deduction on plants and machinery from corporation tax base as part of first year expenditure

BE IT ENACTED by the King’s most Excellent Majesty, by and with the advice and consent of the Lords, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:—

Section 1: Amendments concerning extending capital allowances

1. Capital Allowances Act 2001 is amended as follows.
2. Section 39 is amended such that entries relating to Section 45D to Section 45K are replaced with the following —

Section 45Oexpenditure on plant or machinery

3) Sections 45D to 45N are hereby repealed.

4) Before Section 46, the following are inserted:

“ 45O Expenditure on plant or machinery in other cases

Expenditure is first-year qualifying expenditure if—

(a) it is incurred on or after 1st April 2024,

(b) it is incurred by a company within the charge to corporation tax,

(c) it is expenditure on plant or machinery which is unused and not second-hand,

(d) it is not expenditure on plants or machinery, contributing to the extraction, processing, or directly uses, coal, gas or oil, and

(e) it is not excluded by section 45P (exclusion of expenditure 5 under disqualifying arrangements) or 46 (general exclusions).

45P Exclusion of expenditure incurred under disqualifying arrangements

(1) Expenditure is not first-year qualifying expenditure under section 45O if the expenditure is incurred directly or indirectly in consequence of, or otherwise in connection with, disqualifying arrangements.

(2) Arrangements are “disqualifying arrangements” for the purposes of this section if—

(a) the main purpose, or one of the main purposes, of the arrangements is to secure a tax advantage connected with expenditure being first-year qualifying expenditure under section 45O (including securing the advantage by avoiding a balancing charge under section 59A or reducing the amount or timing of such a charge), and

(b) it is reasonable, taking account of all the relevant circumstances—

(i) to conclude that the arrangements are, or include steps that are, contrived, abnormal or lacking a genuine commercial purpose, or

(ii) to regard the arrangements as circumventing the intended limits of relief under this Act or otherwise exploiting shortcomings in this Act.

(3) In this section “arrangements” include any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).”

5) Section 46 is amended such that —

(a) in subsection (1), entries relating to Section 45D to Section 45K are replaced with the following—

Section 45Oexpenditure on plant or machinery

(b) after subsection (4) the following is inserted —

(4A) General exclusion 6 does not prevent expenditure being first-year qualifying expenditure under section 45O if the plant or machinery is provided for leasing under an excluded lease of background plants or machinery for a building.

5) In Section 51A, paragraph 5, replace “£200,000” with “£1,000,000”

6) In Section 52, entries relating to Section 45D to Section 45K are replaced with the following—

Expenditure on plant or machinery qualifying under Section 45O100%

7) Chapter 5 shall be amended with the following inserted after Section 59 —

“ Section 59A: Disposal of assets where first-year allowance made under section 45S for expenditure

This section applies if a first-year allowance has been made to a company in respect of first-year qualifying expenditure under Section 45O whether or not it is a special rate expenditure

2) If the company is required to bring a disposal value into account for an accounting period by reference to the plant or machinery on which the expenditure is incurred, the company is liable to a balancing charge for that period

3) The amount of the balancing charge is the relevant proportion of the disposal value; and the relevant proportion is determined by dividing—

(a) the amount of the expenditure that was the subject of the allowance, by

(b) the total amount of expenditure that has been the subject of 25 that or any other first-year allowance or has been allocated to a pool for that or any other accounting period.

(4) In relation to the accounting period for which the disposal value is brought into account, TDR (see section 55(1)(b)) for the pool to which the expenditure that was the subject of the allowance was allocated is to be reduced by the amount of the balancing charge.

Sections 59B: Tax avoidance arrangements relating to Section 59A

(1) This section applies if arrangements are entered into the main purpose, or one of the main purposes, of which is—

(a) to secure that a balancing charge under section 59A is not chargeable on a company, or

(b) to secure a reduction in the amount, or a change in the timing, of a balancing charge under section 59A which is chargeable on a company.

(2) Sections 59A is to have effect as if the arrangements had not been entered into.

(3) In this section “arrangements” include any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable).”

Section 2: Amendments regarding structures and equipment

(1) After section 270 of the Capital Allowances Act of 2001, add in the following:

270A Structures and Building Allowance

(1) This section applies for any non-residential building constructed after 1 September 2023, for which qualifying expense was incurred during construction or acquisition.

(2) A person is entitled to an allowance if the person has the relevant interest in the building or structure in relation to the qualifying expenditure and the building is in non-residential use.

(3) The basic rule is that the allowance, in relation to a qualifying activity, for a chargeable period of one year is 5% of the qualifying expenditure.

(4) Qualifying expenditure under Section 271 (3) shall mean any expenditure for construction or purchase of a non-residential structure, excluding:

(a) Alteration of land, except to construct new non-residential structures;

(b) Purchase costs beyond the fair market value of the land or structure; and

(c) Interest costs included in the purchase of the land or structure;

(5) Qualifying activity under Section 271 (3) shall mean any of the following:

(a) a trade,

(b) an ordinary UK property business,

(c) a profession or vocation,

(d) the carrying on of a concern listed in section 12(4) of ITTOIA 2005(4) or section 39(4) of CTA 2009 (mines, quarries and other concerns), and

(e) managing the investments of a company with investment business,

but only to the extent that the profits or gains from the activity are, or (if there were any) would be, chargeable to tax.

Section 3: Amendments regarding deductions due to debt financing

1. In Chapter 3 of the Capital Allowances Act of 2001, add the following:

39A Expenditure for debt financing

Expenditure for the financing of purchases through debt is an excluded expenditure, for the purposes of deductions, including:

(a) payments to interest,

(b) finance charges, or loan fees,

(c) any other charges beyond the fair market price of the purchase.

(2) Expenditure under paragraph 1 is exempt from being chargeable under corporation tax.

Section 4: Commencement and Short Title

1. This Act comes into effect on 1st April 2024.
2. This Act may be cited as Capital Allowances (Full Expensing and Debt Financing Reform) Act 2023.

This bill is written by The Rt Hon. Sir /u/CountBrandenburg GCT KG KT KP GCB OM GCMG GCVO GBE, Secretary of State for Growth, Business and Trade, Member of Parliament for North and East Yorkshire with contributions from The Rt Hon. Sir /u/Sephronar KG GBE KCT LVO, Chancellor of the Exchequer, Member of Parliament for the North West, and His Grace The Duke of Argyll KD GCMG GBE KCT CVO CB PC, Chancellor of the Duchy of Lancaster, on behalf of His Majesty’s 33rd Government, inspired in part by irl Finance (No 2) Act 2023

Capital Allowances Act 2001

Opening Speech - /u/CountBrandenburg

Deputy Speaker,

I come forward today to deliver an overhaul in how we administer corporation tax. Long has it been criticised that our tax regime, and that of many countries, have found itself in favour of debt financing, instead of equity financing. This is not an issue unknown to many governments, it was in 2010 that under the Mirrlees Review that discussed the broad theoretical points on this, suggesting rectifications to our capital allowance scheme. This criticism has been shared by economists across the political spectrum, noting that there is chronic underinvestment on a private sector side.

Capital Allowances are what affect the “base” of corporation tax - affecting the amount of taxable income for corporations, and provide incentives (and disincentives) on different types of investment decisions. This is different broadly from the headline rate of corporation tax, the two rates applied to businesses based on their total profit sizes, and is outside the scope of this bill, to be included in the Budget. The headline rate can be used to control the revenue from different corporation tax base changes and ensuring revenue stability in this sense.

Now our message here is simple, we want our corporation tax to be fair and encourage investment - tinkering with the headline rates as we have done in numerous budgets the past few years does not do that. We rank 33rd out of 37 OECD countries on capital cost recovery, our gross fixed capital formation as a share of GDP has lagged under 20% over the past few years. This is not to say we haven’t undertaken monumental state side investment, but overall we lag behind other G7 countries. That changed here, allowing a deduction on the value of all plants and machinery in the first year, reducing the marginal effective tax rate on plants and machinery. As it stands, it lies at around a 14% Marginal Effective Tax Rate (METR), if we were to enact full expensing whilst maintaining interest deductibility, we would end up with an effective subsidy over its lifetime at -8.6%, hence the need to exclude interest deductibility altogether, to reduce the incentives for high debt liabilities. By excluding debt interest payments altogether, both from allowed deductions and expenditure taxable, we seek to equalise the tax treatment of equity finance and debt finance - both approaching nil METR. This is a pro business measure as it allows them to move away from recording interest payments for tax purposes. We would expect the changes here to lead to a 1% increase in GDP over a decade considered statically.

One thing we call on the opposition to do is back the changes made by this bill, to deliver business confidence. Capital Allowance reforms are only effective where there is continuity in taxable base and consistency in corporation tax rates. This has been acknowledged before by the opposition, and in the interests of promoting investment long term, rather than bringing forward some investment around budget periods because of a change of government policy.

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This division will end on the 31st at 10PM