The United Kingdom is on the brink of snap elections on July 4, 2024, and tax policy is a crucial part of the discussion. In recent years, the UK has experienced unstable policy developments in its corporate tax rate and capital cost recovery provisions. Therefore, it is essential to understand why the current full expensing policy is worth maintaining and extending.
Full expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.
In the years 2020 and 2021, many governments around the world increased their capital allowances as a response to the COVID-19 pandemic. While these policies are expiring elsewhere, endangering critical investment, the United Kingdom has made its central policy improvements permanent.
From April 2021 through the end of March 2023, the United Kingdom enacted a super-deduction, allowing UK businesses to deduct 130 percent of the costs of plant and equipment from their taxable income. This policy was meant to assist business investment in the transition from the previous 19 percent corporate tax rate to the current 25 percent rate, which has been in place since April 2023.
The 2023 Spring Budget replaced the super-deduction with full expensing, shifting the UK allowance for plant and equipment from a 130 percent deduction to a 100 percent deduction. The Spring Budget also extended a 50 percent first-year allowance to certain “integral features” and “long-life items” that do not qualify for full expensing.
The 2023 Autumn Statement made full expensing (and the 50 percent first-year allowance) a permanent feature of the tax code, averting an expiration of the policy in 2026. Absent permanent full expensing, the UK would have returned to an 18 percent declining balance allowance for plant and equipment, shifting from a 100 percent deduction to a 75.8 percent deduction (in net present value terms), well below the current OECD average of 85.6 percent.
Model simulations by the Tax Foundation and the Centre for Policy Studies estimate that permanent full expensing raises long-run GDP by 0.9 percent, investment by 1.5 percent, and wages by 0.8 percent, relative to a return to the pre-2021 law.
Given the positive contribution of full expensing to economic growth and that the UK already incurred the peak-year costs due to the existing policy, it is imperative to maintain it permanently. Fortunately, the country’s two largest political parties have already signalled an understanding of this. Ahead of the upcoming election, the Labour Party and the Conservative and Union Party manifestos both reiterate their commitment to maintaining the current policies of full expensing and the annual investment allowance.
The Conservative manifesto also calls for extending full expensing to development on Brownfield sites. Currently, the Structures and Building Allowance (SBA) allows businesses to deduct building costs of commercial properties at a flat rate of 3 percent, resulting in deductions with a net present value of 39.1 percent (below the OECD average of 47.2 percent), but not for residential development. Full expensing for all Brownfield development would increase the value of these deductions from 39.1 percent to 100 percent for commercial and from zero to 100 percent for residential development, respectively, as long as they are located in areas designated as Brownfield.
The United Kingdom’s current tax treatment of commercial buildings ranks 22nd in the OECD for 2024. Implementing full expensing for Brownfield development would catapult it to the top spot, together with Estonia and Latvia, and also improve its overall cost recovery rank from 14th to 3rd.
As the UK nears its snap elections, the future of its tax policy hangs in the balance. The decisions made now will have far-reaching implications for businesses, the economy, and the country’s standing in the global community. It is crucial, therefore, that the importance of full expensing is recognized and upheld.
Source: Tax Foundation