20 April 2022
Statistics released by the Office for National Statistics (ONS) in March 2022 highlight that business investment in the UK is still struggling to get back to pre-pandemic levels, with the amounts invested over 10 per cent lower in 2021 than in 2019. Unless businesses accelerate their business investment plans now, they will likely miss out on generous capital allowance tax reliefs.
The UK tax regime has historically not been very favourable towards capital investment – for example, there is no automatic tax relief for depreciation on tangible fixed assets charged in the accounts – instead, there is a complex system of capital allowances. Under this system, the default position is that 80 per cent of the tax relief on acquiring an asset is received over a time period ranging from nine to over 27 years.
The relatively ungenerous tax treatment of capital expenditure could be a contributing factor to the UK’s poor business investment levels highlighted by the Chancellor of the Exchequer in his Spring Statement 2022 and the latest ONS statistics. Businesses in the UK invest less as a proportion of GDP than the average of OECD member countries (10 per cent vs 14 per cent).
However, at the time of writing we are currently just over halfway through the period of the temporary ‘super-deduction’ regime, which represents the UK’s most generous ever tax relief for qualifying capital expenditure. The super-deduction provides businesses that are subject to UK corporation tax with a 130 per cent tax deduction for ‘main pool’ assets, which compares to an 18 per cent per annum reducing balance allowance prior to the super-deduction. In addition, there is also a 50 per cent tax deduction for ‘special rate pool’ assets over the same period, compared with the usual 6 per cent per annum reducing balance allowance.
The main pool broadly includes most eligible assets, such as trade plant and machinery, IT and data installations, staff welfare material and security equipment, with a life span of less than 25 years. The special rate pool is for longer lasting assets expected to have a life span of 25 years or more, but also applies to a lot of building services assets, such as electrical and lighting installations, plumbing works, heating and air conditioning.
Another key tax relief for capital expenditure is the annual investment allowance (AIA), which allows a 100 per cent tax deduction for most businesses (not just those paying corporation tax) for eligible costs up to a prescribed limit. The default expenditure limit for this relief is £200,000 per year, although it has been temporarily increased to £1m since 2019.
These enhanced capital expenditure incentives are due to expire on 31 March 2023. This cut-off date, combined with the planned rise in the main rate of corporation tax from 19 per cent to 25 per cent on 1 April 2023, presents a potential cliff edge for impacted businesses. In short, the post-tax cost of qualifying spend made before this deadline will be significantly lower than any investment made once these reliefs have expired.
As we move on from the disruption of Covid-19 and navigate our way through new ways of doing business, including hybrid and more flexible work patterns, many organisations will find themselves having to adapt or refurbish their buildings or even consider moving to new premises. Such events often come with a capital expenditure requirement, and so the availability of the super-deduction and enhanced AIA will act as a welcome boost to those making key investments.
However, the time-limited nature of these incentives (only available for expenditure in the two years between 1 April 2021 and 31 March 2023) is likely to create winners and losers, as we will see significant differences in the tax effect of identical commercial transactions that are separated by a few days.
Taking a longer-term view, the Chancellor announced his intention to potentially reform and boost the UK tax incentives for capital investment, recognising the UK lags behind in this area. This would be welcome and could provide the shot in the arm the UK needs to close the gap to its competitors and drive increased productivity throughout the economy.
However, in our view any changes should not be as time-limited as the super-deduction – two years is a relatively short window for businesses to consider, approve and enact significant investment decisions.
Similarly, taking a cliff-edge approach to tax relief can have detrimental impacts, as has been shown with the stamp duty land tax holiday, which resulted in a spike in demand for residential property and, in turn, higher costs for taxpayers.
Instead, the Government could consider a five-year minimum term for any enhanced tax reliefs for capital investment and commit to advance notice of at least a year for any planned changes or withdrawals. Fiscal incentives are generally welcome, but what businesses really desire is certainty of government policy and the ability to make long term plans.