How the Chancellor can further encourage business investment

The prime minister has reportedly stated that the UK’s growth figures are “not good enough” following the statistics published by the Office for National Statistics for Q3 2024. Amongst these grey clouds was the silver lining of increased investment by businesses. Part of the Chancellor’s plan to improve the country’s anaemic growth is to further encourage investment by businesses and, alongside the Budget, a Corporate Tax Roadmap has been published. One of the key areas covered in the roadmap is capital allowances. 

Capital allowances provide tax relief for investment in certain qualifying assets. Assets are grouped together depending on what type of allowances they are eligible for, and generally relief is given over a period of time that is intended to reflect the economic life of the assets.

The UK currently offers a number of capital allowances incentives that enable the tax relief to be accelerated, among these is the Annual Investment Allowance (AIA), which gives a 100% deduction on the first £1m of qualifying spend each year. In addition, businesses that are subject to corporation tax can claim a First Year Allowance (FYA) deduction of either 50% or 100% of expenditure on qualifying assets in year one, depending on the nature of the assets. Assets that are bought to lease out are typically excluded.

Within the Corporate Tax Roadmap, the government has committed to retaining not only 50% and 100% reliefs, but also the principle of writing down allowances. Additionally, it intends to explore extending the 50% and 100% reliefs to assets that are leased out. It will also seek to clarify what qualifies for capital allowances including the treatment of pre-development costs following a tribunal case last year (Gunfleet Sands and others vs HMRC). We think there is scope for improvement, not only to further incentivise growth, but also to ensure the tax system treats all businesses equally, regardless of size or legal structure. Here are three further opportunities for the Chancellor to consider:

• Reform the writing down allowance rates. Currently, even where relief at 50% is available in the first year, it takes 28 years to get around 90% relief for assets in the special rate pool. In many cases, this is out of line with the economic life of these assets. Increasing the special rate writing down allowance to 10% (as originally was the case over 15 years ago) would give around 90% relief over 17 years.
• Extend the 50% and 100% reliefs to all businesses including, for example, limited liability partnerships (LLPs). Large partnerships often fall in between these reliefs and the AIA. The £1m AIA is used up very quickly by large businesses, but LLPs made up of individuals cannot claim the 50% and 100% reliefs.
• Fast track legislation and guidance on pre-development costs to give those undertaking large development projects certainty about how their costs will be treated for tax purposes. The pre-development phase of large-scale investments often spans several years, and a prolonged period of uncertainty will damage business confidence, potentially jeopardising investment decisions.

Aside from our suggested changes above, our final ask would be that the government then commits to leave the capital allowances regime untouched for the remainder of the parliamentary term, allowing businesses to have confidence to make long-term investment decisions that take account of the tax reliefs available.