Should the chancellor go further on business tax relief?

Full expensing relief currently allows corporate businesses to deduct 100% of their costs in acquiring certain assets in the year they’ve been acquired. It is due to run from 1 April 2023 to 31 March 2026. A number of media outlets have reported that the chancellor plans to extend the scheme for a further year until 31 March 2027. In our view this would be a missed opportunity – either making this permanent or a much longer term such as a five year extension should be considered. 

When Rishi Sunak, as chancellor, unveiled the capital allowances super-deduction scheme in his 2021 Budget he hailed it “the biggest business tax cut in modern British history”. It was due to run for two years. By the time it was due to expire, Sunak had become prime minister and Jeremy Hunt was chancellor. He continued where Sunak had left off, announcing a three year “full-expensing” shortly before the super-deduction expired, which was designed to offer broadly the same benefits as the super-deduction. Taken together, these measures provided five years of very generous investment incentives for UK corporate businesses.  In 2021, the OBR predicted it would boost business investment by 10%.

More recently, these numbers have been quietly rounded down and the OBR now says that the outcome was that the super deduction increased business investment by around 5%. No doubt this is still impressive, and the super-deduction has been a great benefit for British businesses. But the fact that the policy has resulted in only half of the expected investment boost suggests that the work is not yet done. The difference may stem from the unavoidable fact that stimulating capital expenditure is a slow process. It takes a long time for business plans to turn into capital spend, so placing time limits on tax policies which concern long term behaviours are likely to underperform, as was the case with the super-deduction.

The aim of these incentives should not be to encourage companies to buy more laptops or IT equipment. Instead, we should be thinking about the bigger picture and long-term.  How do we use this to stimulate investment and innovation on a grander scale, including new manufacturing facilities, upgrading the stock of office space to improve energy efficiency, attracting private capital to support health and social care or bringing our transport infrastructure into the 21st century. These types of projects require medium to long-term planning. Whilst the super-deduction and full-expensing regimes look set to last for five years, or six if extended by the chancellor next week, it won’t be a true five/six years. Rather it will be two years, followed by an extra three years announced at short notice with a further year tagged on midway through.

Take one of the examples above – for a new manufacturing facility, a business needs to:

• undertake feasibility studies;
• find a suitable location;
• design the project;
• apply for and receive planning permission;
• run a tender process;
• construct the building;
• install and commission the specialist equipment.

With all of the other macro pressures – energy price inflation, rising interest rates and supply chain disruptions – achieving all of the above in a two to three year period is hugely challenging. With this in mind, the government should take a pragmatic and long-term view towards capital investment incentives. Tinkering around with a year’s extension here or there will not have anything like the impact permanent change would do. Instead, a bold approach could have transformational results on UK business investment.