Chancellor Jeremy Hunt will use next week’s Budget to set out a new capital allowances regime for businesses, to offset a sharp rise in corporation tax and the end of a £25bn “super-deduction” tax break for investment.
Conservative MPs have urged Hunt to be bold and unveil tax cuts to offset headwinds caused by the increase in corporation tax from 19 per cent to 25 per cent in April, even if the fiscal situation is tight.
Hunt has consulted on a range of reforms to replace the “super-deduction” scheme for capital investment — a two-year measure offering 130 per cent tax relief on companies’ purchases of equipment.
Hunt recently told business groups the new tax regime would not be anything like as generous as the “eye-wateringly expensive” one it replaces: the super-deduction is estimated to have cost £25bn over two years.
One senior government official said the “mood music was good” for further tax breaks to support business investment, pointing to speeches made by Rishi Sunak and Hunt.
Hunt’s consultation included “full expensing”, which would allow all qualifying capital expenditure to be written off by companies against their taxable profits in the year it is incurred.
But the Treasury has estimated it could cost £11bn a year — not much less than the super-deduction scheme.
Business groups expect more modest reforms to capital allowances in the Budget, possibly phased in over a number of years.
Hunt has made it clear that any tax changes will have to be funded within a tight fiscal framework.
The chancellor announced last November that he would set the annual investment allowance for companies at £1mn, its highest ever permanent level, from April. This means most businesses can write off up to £1mn against taxable profits.
The Treasury declined to comment on tax measures in the Budget, but Hunt has previously said that any money available for tax cuts on March 15 would be prioritised for businesses rather than individuals.
The chancellor has been handed draft forecasts by the UK fiscal watchdog showing the economy will barely meet his fiscal rule to have public debt as a share of output falling in five years’ time. The “fiscal headroom” in the fifth year is thought to be just £9bn.
However, Hunt does have some more flexibility in the next couple of years thanks to an unexpected £30bn windfall in the public finances, partly from higher than anticipated tax receipts in 2022-23.
Several business groups, including the CBI and Make UK, the manufacturers’ trade body, are pushing for an extension of the super deduction scheme, with one proposal focused on a gradual introduction of tax relief at a lower level to avoid the cost of the current arrangements.
The CBI estimates that a full expensing scheme would cost between £4.4bn to £7.7bn in 2023-24. But it has proposed a “road map” option offering a 50 per cent rate that would cost between £1.2bn and £2.5bn in the next financial year.
Some companies at the Make UK annual conference in London on Tuesday made clear their concern about a 6 percentage point increase in corporation tax coming at the same time as the expiry of the super deduction scheme and the scaling back of research and development tax credits.
Others complained the lack of a government industrial strategy suggested that manufacturing was no longer a ministerial priority, with even the phrase now dropped from the name of the business department.
But Kevin Hollinrake, business minister, told the Make UK conference that “manufacturing really matters and that is something that’s understood right at the top of government”.