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Make capital allowances permanent, firms urge

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Business groups have urged the government to make permanent a new £9 billion-a-year capital allowances scheme designed to stimulate investment.

The chancellor yesterday announced a new “full expensing” policy for the next three years under which businesses can deduct 100 per cent of the cost of capital spending for certain plant and machinery against taxable profits, cutting their overall tax bill.

The tax cut, which comes into effect next month, was announced amid concerns among business leaders at the rise in the main rate of corporation tax to 25 per cent from 19 per cent from next month, which coincides with the end of the “super-deduction” tax incentive.

Jeremy Hunt said the new scheme meant that “every single pound a company invests in IT equipment, plant or machinery can be deducted in full and immediately from taxable profits”.

“It is a corporation tax cut worth an average of £9 billion a year for every year it is in place,” he said. “And its impact on our economy will be huge.”

Hunt added: “The OBR says it will increase business investment by 3 per cent for every year it is in place. This decision makes us the only major European country with full expensing.”

The scheme applies to spending on the likes of warehousing equipment such as forklift trucks, tools such as ladders and drills, construction equipment such as bulldozers and excavators, and machines such as computers and printers.

The full expensing scheme was announced alongside another capital allowances incentive. Combined they are worth £27 billion over the next three years.

The second capital allowance deducts 50 per cent of the cost of other plant and machinery, known as special rate assets, from profits during the year of purchase. This includes “long life” assets such as solar panels and thermal insulation on buildings. The allowance was due to end this month but has been extended by three years.

As part of the government’s plans to boost business investment, a new research and development scheme for 20,000 small businesses, worth about £500 million a year and available from April, was also announced by the chancellor.

The new scheme’s target is loss-making “R&D intensive” small businesses — those allocating 40 per cent or more of total expenditure to R&D — and was welcomed by the UK’s BioIndustry Association.

Hunt said it was the government’s intention to make the full expensing allowance permanent “as soon as we can responsibly do so”.

It prompted business groups and tax experts to urge the government to make the commitment in order to utilise the full benefit of the allowance.

James Brougham, senior economist at Make UK, which represents the manufacturing sector, said: “Industry will welcome this boost to investment, which is key to unlocking improved productivity for both the sector and the wider economy.”

He added that “a longer or permanent implementation [of the allowance] would better fit the longer investment cycles of the sector. Concerns also remain for those smaller businesses with less access to capital, as it is those companies who are more likely to lease or buy second-hand plant and machinery [and] both methods of capital investment are excluded from the announced scheme’s benefit.”

Chris Sanger, head of tax policy at EY, said introducing the allowance for three years “helps the chancellor to balance his books and actually generates extra tax receipts in 2027/28 as the timing effect reverses, but uncertainty over the longevity may limit the effectiveness”.

Sanger added: “These large projects take time to become ‘shovel ready’, not least due to planning and other requirements. The sooner the chancellor can achieve his aspiration and reassure businesses that this incentive will cover projects with long lead times, the greater the investment the UK is likely to attract.”

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