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Tax relief certainty for long-term business plans

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In his Autumn Statement, Jeremy Hunt sought to incentivise investment with full expensing, Freeports and investment zones.

22nd Nov 2023
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In a move that has both been widely anticipated and strongly lobbied for by over 200 businesses and industry trade bodies, the Chancellor of the Exchequer today in his Autumn Statement, made capital allowances “full expensing” a permanent measure. 

Full expensing had been introduced in April 2023, following the March 2023 Budget, as a temporary measure lasting for three years and was intended to boost investment in the economy and to encourage growth. It allowed companies to claim a first-year capital allowance of 100% of the cost of main pool plant and machinery and a 50% first-year allowance of the cost of special rate pool (SR pool) plant and machinery. 

Fiscal headroom

In the 2023 March Budget, the Chancellor expressed a wish to make full expensing a permanent measure as soon as he had the fiscal headroom to do so. Today, he stated that the measure would cost in the region of £11bn to implement but would increase investment by £3bn per annum and £14bn over the longer term. 

When originally considering whether or not full expensing could be made permanent, the Office for Budget Responsibility (OBR) was thought to be overly pessimistic about the cost to the Treasury. In March 2023, it estimated that the measure would cost some £10bn a year in the short term but the Institute for Fiscal Studies stated in October 2023 that the OBR had failed to take into account the fact that this was just really a deferment of tax, not an absolute loss, and that the measure was likely to cost just £1bn to £3bn per annum when up and running. 

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Positive impact

This is a welcome move for all businesses, with a potentially positive impact on investment and growth. Over a number of years, successive governments have tinkered with the capital allowances regime, but the temporary nature of the measures introduced created a series of cliff edges and were not available for long enough periods to really stimulate investment in major capital projects. Many projects have long lead-in and procurement times, and the enhanced capital allowances introduced were at an end before projects even got off the ground. This was evidenced during the period of the 130% super deduction, which was designed to get businesses investing again post-Covid but only lasted for a period of two years. The same happened with the annual investment allowance which swung wildly as a temporary measure of between £25,000 to its current rate of £1m – an incentive that has now too been made permanent.

What businesses need, above all else when considering major capital investment programmes, is certainty. Making full expensing a permanent measure provides that certainty and should provide a major boost to elements of the supply chain. It is often forgotten, for example, that plant and machinery allowances are also available for investment in plant and machinery fixtures within commercial property. So, this measure will also stimulate investment in the real estate sector, having a positive impact on direct employment in the construction industry and suppliers of products servicing that industry and the wider economy generally. 

Freeports period extended

The theme of business certainty continued with the Chancellor’s announcement that he was increasing the period over which tax reliefs could be claimed for investment in English Freeports from five years to 10 years until 2031. Since the establishment of the Freeport zones, 100% enhanced capital allowances were available for investment in qualifying plant and machinery, and the availability of structures and buildings allowances accelerated from 33 years to 10 years. The five-year period was creating another cliff edge for investors in Freeports. However, with the full expensing for investment in plant and machinery being made permanent today, the effect of the extension of the time period in Freeports has limited marginal benefits and primarily only affects structures and buildings allowances.

Creation of new investment zones

The Chancellor also announced the creation of four new Investment zones in England and a second one in Wales. Similar in nature to Freeports, with a range of incentives to encourage investment, including enhanced capital allowances, the new zones and the 12 proposed zones already announced were also to benefit from an extension of the time period of when tax relief was available within the zone from five years to 10 years, like the extension announced for Freeports. 

The new English investment zones were announced for West Yorkshire, West Midlands, East Midlands and Greater Manchester, with the second investment zone in Wales announced for Wrexham and Flintshire.

Game changer

The measures announced in relation to Freeports should have a limited effect on investment in such zones. The announcement of four additional investment zones for England, and the second zone in Wales, is a positive measure and demonstrates a commitment to encouraging investment in specifically targeted geographic areas. 

However, the permanent nature of full expensing could be a game changer for investment in capital projects throughout the UK. Businesses can now put in place long-term strategic plans in the knowledge that they will obtain tax relief for incurring major levels of capital expenditure on such assets. As the Chancellor stated in his speech, these measures, taken together, give the UK one of the most attractive capital allowance regimes in the world. It remains to be seen if businesses proactively use the incentives now available to invest, grow and make the UK economy more productive.  

Visit our dedicated Autumn Statement 2023 hub here to find all related articles from our experts.

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