The Inland Revenue is considering abolishing capital allowances as its next step in attempting to bring tax rules into line with accounting rules, tax experts said this week.
Its decision last month to drop two landmark court cases, Herbert Smith and Jenners, has been widely interpreted as a sign the Revenue is stepping up efforts to bring tax treatment of income and expenditure closer to its accounts treatment.
As it announced its decision, the Revenue said provisions properly made under accounting standards would now be tax deductible, a principle it had disputed in the two cases.
Tax experts are speculating that the Revenue will now consider abolishing capital allowances and make depreciation tax deductible.
John Whiting, tax partner at PricewaterhouseCoopers, said: ‘These cases and the decision not to pursue them shows the Revenue is increasingly saying “accounting accounts” rather than “tax accounts” rule. This brings us back to capital allowances and depreciation as the main difference between them.’
He added that the capital allowance system was geared for the manufacturing industry, and did not reflect the increased importance of the service sector.
While capital allowances rules are complex, well established and have been one of the first targets of the tax law rewrite, Whiting argued: ‘The Revenue has tackled the foothills. It should now consider the mountain.’
The Chartered Institute of Taxation is leading discussions on the issue.
A Revenue spokesman said no plans were yet in place, although insiders talked of internal ‘mutterings’ about the issue.
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