12 April 2022
The Rishi Sunak finds himself fighting political fires at a time when he undoubtedly hoped to be putting the wheels of his Tax Plan for “Capital, People, Ideas”, announced in the Spring Statement, into motion. The Chancellor may be hoping that his proposals reinvigorate the UK’s economic and his political fortunes but where capital is concerned, the plan is more of a history lesson in capital allowances than a big idea.
The goal is admirable, the tax plan recognises that the UK has a long-standing issue with productivity, partly due to a lack of capital investment, with UK companies investing less as a percentage of GDP than our competitor countries (10 per cent v 14 per cent). The tax plan also suggests that our tax system does not reward business investment as much as other countries do.
Businesses need certainty from the tax system, but the reliefs available via capital allowances are constantly in flux. This means when approving large investment decisions spanning multiple years, businesses cannot be sure what capital allowances will be available in the long-term.
In addition to the normal writing down and annual investment allowances, businesses are currently entitled to the ‘super-deduction’ for capital investment on plant and machinery. This is a temporary enhanced relief allowing for 130 per cent relief on qualifying investments, running between April 2021 and March 2023.
The Tax Plan sets out some illustrations of the changes the Government could make once the ‘super -deduction’ comes to an end:
- “Increase the permanent level of the Annual Investment Allowance (‘AIA’), for example to £500,000” – the AIA was first introduced in April 2008 and was limited to £50k. Over the proceeding years, it has been in constant flux, at various times going up and down between £25k and £1m. Since 2019, it has been set at the enhanced ‘temporary’ level of £1m (with the underlying limit remaining at £200k). The Tax Plan’s idea of increasing it to £500k on a permanent basis is a reduction from the current £1m limit and just further tinkering, taking us back to the level set in 2014/15.
- “Increasing Writing Down Allowances for main and special rate assets from their current levels of 18 per cent and 6 per cent to 20 per cent and 8 per cent” – another way of looking at this is returning the main rate to 20 per cent which applied from 2008 to 2012 and returning the special rate to the 2012 to 2019 rate.
- “Introduce a First Year Allowance (‘FYA’) for main and special rate assets where firms can deduct, for example, 40 per cent and 13 per cent in the first year, with the remaining expenditure written down at standard Writing Down Allowances” – the FYA of 40 per cent for main rate assets would be returning to the pre-2008 system (special rate assets did not exist back then).
These suggestions are simply rehashes of previous rates and systems, as opposed to new ideas. Given the UK’s significant lag in capital investment, it feels like further adjustments along these lines will have limited impact.
If we want significant change, the Chancellor may be required to be bolder. There are signs he is willing to go further, with the tax plan including two other ideas:
- “Introduce an Additional First Year Allowance, to bring the overall amount that can be claimed to greater than 100 per cent of the initial cost”; or
- “Introduce full expensing, to allow businesses to write off the costs of qualifying investment in one go.”
These two ideas are generous and anticipated to cost £4bn and £11bn respectively per annum. However, even if one of these ideas is introduced, with the Government’s ever-changing focus and cabinet reshuffles, will this policy last long enough to give businesses the stability they need to make a long-term capital investment?