Can bold capital allowances reforms help the UK with levelling up on the international stage?

17 May 2022

On his recent visit to Stoke-on-Trent as part of the UK’s levelling up agenda, Rishi Sunak shared one of the major issues on his mind. Capital investment by UK businesses was 10 per cent of GDP compared with 13 per cent on average in the US, Germany and France. British businesses are lagging behind our international competitors when it comes to capital investment and the Chancellor thinks this is holding back growth in the UK.

The Treasury’s recently-published policy paper on potential capital allowance reforms invites views on what the UK government can do to help the UK level up capital investment on the international stage. 

The end of super-deduction

A capital allowance super-deduction currently gives 130 per cent tax relief for qualifying capital expenditure as an incentive to UK companies to invest in plant and machinery and drive forward growth. This enhanced tax relief comes to an end on 31 March 2023, having been in place for two years.

The two-year window for a capital allowance super-deduction is simply not long enough to plan and spend on significant capital projects, especially given the global political issues we have all experienced throughout the pandemic and the current war in Ukraine which has had a significant impact on supply chains.

So what’s the answer?

Over the last few months, I have discussed this issue with many businesses who are investing hundreds of millions in the UK and top of their wish list when it comes to tax relief is one thing – certainty.

Any reforms should be in place for five years to give an established tax treatment which they can plan for. Businesses should have confidence in what the tax rules will be in the future to help plan capital expenditure with certainty. Put simply, a capital allowances road map with no cliff edges.

The Chancellor needs to be bold to address his concerns that the UK is lagging behind our international competitors on capital investment. A permanent first year allowance of 100 per cent would provide the required boost to help accelerate capital investment and growth. Whilst a costly measure to implement, the Treasury will benefit from increased tax receipts that future profits will generate. This will help the UK cultivate its way out of any future recession.