Rishi Sunak has made ‘long-term decisions’ the leitmotif of his government. Today’s Autumn Statement announcement on permanent full expensing – which will allow businesses to write off capital investment costs against corporation tax immediately and in full – shows his Chancellor is singing from the same hymn sheet.
While it might sound dry, this tax reform is a vital step towards fixing one of the key structural weaknesses in the British economy: lacklustre business investment. Hunt’s announcement today will help boost productivity, economic growth and wages. In due course, full expensing should make us all – businesses, workers and consumers – better off.
The current version of full expensing, introduced in the March 2023 Budget but due to expire in March 2026, allows businesses to offset 100 per cent of most types of plant and machinery investment against their tax bill up front. Research by the Centre for Policy Studies and the Tax Foundation suggests that making the current version of full expensing permanent – as Hunt did today – would boost the long-run capital stock by 1.5 per cent, and deliver a 0.8 per cent boost to wages and a 0.9 per cent boost to long-run GDP. Other people’s findings are even more positive.
This is in contrast to traditional investment allowances, where the tax deduction is spread over time. The more you spread out a deduction, the less valuable it becomes because of inflation and the time value of money (‘a bird in the hand is worth two in the bush’). Indeed, for some years before the introduction of the ‘super-deduction’ investment allowance in 2021, the UK tax system ultimately permitted only 62 per cent of investment costs to be deducted (on a net present value basis).
Full expensing, however, will act as a powerful investment incentive for businesses.