15 November 2023

Put a ring(fence) on it and make full expensing permanent!


Despite the fairly gloomy outlook, the Autumn Statement is rumoured to contain a ‘rabbit’ for businesses – permanent full expensing.

The policy, currently set to expire in 2026, allows UK companies 100% tax relief on qualifying plant and machinery investments to help accelerate growth and improve infrastructure.

Most importantly, full expensing enables companies to write off the total cost of investment in one go, offering a direct tax reduction. For every pound a company invests, its taxes are reimbursed by up to 25p. This immediate financial relief is particularly beneficial for businesses looking to expand or upgrade their technological capabilities – a pressing need as Britain has remained the most undercapitalised economy in the G7 since 1970. The policy covers most tangible capital assets, other than land, structures, and buildings, used in a business, including a wide range of machinery and equipment.

This policy is exclusive to companies subject to Corporation Tax, excluding unincorporated businesses. Nevertheless, the latter can benefit from the Annual Investment Allowance (AIA), providing similar benefits for investments up to £1m.

Until now, the Chancellor has suggested that he wants to make it permanent – but only when ‘we can responsibly do so.’

The Treasury’s reasoning is – as ever – the cost. But while it estimates an upfront cost of around £10bn a year, most of this will be recouped in future years. The true cost is  estimated to be around £1-3bn annually.

In reality, the temporary nature of the tax break means that its long-term impact on the UK’s capital stock might be negligible, as noted by the IFS. The CBI and Oxford Economics estimated that this policy would boost investment to £52.8bn by 2030/31 – but this will only be achievable if it becomes permanent.

Extending the policy beyond April 2026 to become permanent is a pragmatic and bold step, although its effect on large, long-term investments would still be limited. Permanent implementation as part of a broader reform could more effectively stimulate sustained growth in the capital stock and output.

There are other measures which the government must urgently consider, not least changing the headline rate of corporation tax. The gradual reduction in the headline rate under the coalition government was hugely welcome and meant that the effective rate was also one of the most competitive in the OECD. In spite of the introduction of the super deduction in 2021, jacking up corporation tax to 25% at the start of this financial year was an error, not least because of a large and growing number of both struggling and zombie companies after the pandemic. The new level only adds to the cascading credit risk which faces British businesses.

Full expensing in the UK marks a significant shift in the taxation landscape for businesses. While it currently stands as one of the most attractive tax regimes for plant and machinery investment, its full potential hinges on its permanence and expansion to include all assets. The current approach, albeit helpful in the short term, must evolve to create a stable, growth-oriented environment for businesses in the long run.

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Maxwell Marlow is Director of Research at the Adam Smith Institute.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.