Realist, not conformist analysis of the latest financial, business and political news

A Truly Desperate Misunderstanding About Capital Allowances

A Richard Murphy

The Adam Smith Institute is arguing that capital allowances should be replaced by immediate expensing. On the grounds that profit is what is taxed, profit is what is left over after all expenses have been paid. The whole debate about depreciation and capital allowances is only that the taxman would like to have his money earlier. So, they force companies to delay recognising some of their costs – their investment costs – for tax purposes so that reported profit is frontloaded and therefore so is the tax bill.

The way our of this is simply to account for profit on a cash basis. You spent the cash you get the deduction at the time you spent the cash.

Richard Murphy – for of course it is he – gives us 22 pages as to why this shouldn’t happen, instead it should all be much more complicated that that for of course it should. In which he gives us this near insane comment:

The ASI calls describes their campaign as being against what they call a ‘factory tax’. That is
because it is their suggestion that businesses that invest in productive equipment that lose
out because of the way in which the capital allowance system works. However, that is not
true. All businesses, in whatever sector they operate, usually qualify for capital allowances
on most of their capital expenditure. In fact, what is quite remarkable about this tax relief is
just how indiscriminate it is, providing relief whether or not the assets acquired by
businesses are of benefit to society or not, and whether or not the business itself is socially
useful, or not. As a result, tax relief is given for expenditure on carbon producing assets,
those assets used to support addictive gambling, and on assets used to facilitate the sale of
tobacco related products, and often at rates no different to those available on assets
available for significantly more socially desirable activities. The ASI’s characterisation of
capital allowances is in that case wrong.

No, this is not a special allowance for productive equipment, that isn’t what is going on at all. It’s a way to accelerate the tax bill due on profits. But profits are, obviously enough, what is left over after all expenses. So whether the costs are of benefit to society is an irrelevance. Because that’s not what is being taxed nor is it what the allowance is trying to encourage. It is profits whih are being taxed. Thus we offset the cost of producing them against the revenues in order to work out what the profits are.

It’s the base mindset that is wrong here. The special arrangement is not to pleasure certain sorts of businesses with a tax break. It is to perform the essential function of working out what are profits that can be taxed?

But it gets worse, of course it does, this is Murphy:

The difference in arrangements can be justified firstly
because the cost of borrowing for large companies is usually substantially lower than it is for
smaller companies, and so large companies do not require state support for their business
cash flow in the same way that smaller ones might, and which the tax relief that smaller
companies enjoy provides.

But if this is all about the cost of borrowing then why are we trying to accelerate the tax payments of business at all? After all, we all know that government can borrow cheaper than private industry. For that is the justification of so many of Murphy’s schemes, that government should be doing the investing rather than private business.

It’s this sort of thing that so grates with Murphy’s plans. He just never does plug all the disparate parts together. If cashflow issues and the price of debt matter then government should be delaying – by allowing immediate expensing for example – tax collection. Murphy agrees on he price of debt but wants to continue to accelerate the payments.

Which, really, is most of what we need to know about Murphy’s plans for anything.

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Diablo Vortek
Diablo Vortek
3 years ago

The lack of formatting around quotes occasionally makes it appear that the author is saying the most asanine things. “Quotation marks make all the difference”

3 years ago

Murphy does not see that the function of taxes is to raise necessary revenues for government, not to ensure that all industrial activity conform to his value system (sorry, is “socially desirable” because we all share his value system), nor even to ensure that a minimum of it is spent processing, ew!, tobacco. He supports a complicated tax system on the basis that it makes it easier to be a busybody.

3 years ago
Reply to  Spike

More specifically, that it makes it easier for him to be the busybody and get a nice fat grant to “research” solutions to problems that don’t exist in the real world nor even in any “through-the-wardrobe” alternative reality.

Given the incoherent, contradictory codswallop he proposes, I think the single consideration in Captain Potato’s value system is “can I get paid for this?”

3 years ago

“There is a third reason why the ASI’s claims are also inappropriate. The rates of tax relief on capital expenditure in the UK might be low, but so too as are UK corporation tax rates. This is not by chance. Since 2008 there has been an explicit pact between UK governments and the large corporate tax lobby that accepted the argument that corporation tax rates for larger companies should be reduced, but on condition that their tax relief on capital expenditure was curtailed.” Let’s use the Murphy’s own ‘3 reasons’ bollocks: 1. What is the difference Richard between explicit, implicit… Read more »

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