Jeremy Hunt is set to turn down business appeals to use next month’s autumn statement to extend a £10 billion tax cut. This is aimed at boosting corporate investment in the UK, despite increasing concerns about the economy.
During the spring budget in March, the chancellor presented the multibillion-pound “full expensing” investment relief. He said he intended to make it a permanent fixture “as soon as we can responsibly do so” to kickstart economic growth.
Industry leaders push for three-year policy extension
Industry leaders are gearing up to engage with Hunt during a series of meetings at Downing Street this week. They will press for the three-year policy extension in the autumn statement on 22nd November, aiming to address Britain’s deteriorating growth outlook.
Nevertheless, it is anticipated that Hunt will tell bosses that limitations on public finances prevent him from altering the direction, following a significant increase in government borrowing costs in recent months.
Vulnerable state of public finances
Despite the chancellor being expected to focus on bolstering economic growth and increasing business investment, sources close to the government highlighted the policy’s substantial cost and the vulnerable state of public finances.
Implemented in April to mitigate the rise in corporation tax from 19% to 25%, full expensing enables companies to recover the cost of investments in IT equipment and machinery by permitting them to offset these costs against their taxable profits. Initially, this policy was projected to cost £8 billion this year, but according to the Office for Budget Responsibility, making it a permanent fixture could potentially lead to an annual cost of approximately £10 billion.
Hunt has previously argued that the program could become permanent “when fiscal conditions allow,” but warned this month that “difficult decisions” would be necessary due to the deterioration of public finances. The expense of long-term government borrowing on financial markets this month reached its highest point since 1998.
Pressure from Conservative MPs
The chancellor faces pressure from Conservative MPs to reduce taxes in an attempt to reverse the Tories’ declining opinion poll ratings.
Data from the Confederation of British Industry indicates that private-sector performance declined throughout the three months leading up to October, according to a report published on Monday. This downturn was observed across the services sector, distribution, and manufacturing.
Alpesh Paleja, the chief economist at the CBI, mentioned that companies were facing obstacles due to elevated costs, a shortage of staff, and febrile demand conditions. “Chronically weak activity underscores the scale of the challenge the chancellor faces to break the UK’s low-growth cycle,” he said. “Bold action to mobilise the workforce, streamline planning processes, and make full expensing for investment permanent, is crucial to boosting UK productivity.”
UK lagging behind global competitors
In a different report, the Make UK manufacturing group emphasised the need to extend the full expensing policy for companies to support their investment strategies. According to a survey conducted among its members, most had intentions to invest in advanced technologies like artificial intelligence. However, 40% of respondents expressed concerns that the UK was lagging behind global competitors.
Hunt is expected to conduct meetings with the UK’s top four major business associations this week and the one following it, leading up to the autumn statement. Industry sources said they believe that full expensing is still under consideration within the Treasury and is likely to be a significant topic of the agenda. But, they acknowledge that securing any changes would be challenging. “I don’t think it’s a lost cause,” said one.
Promising option
One potential approach could be to extend the period of full expensing from three years to five to provide companies with greater certainty, as suggested by the British Chambers of Commerce.
Alex Veitch, who serves as the head of policy and insight at the BCC, pointed out that research conducted by their members across the UK demonstrates that the program is already yielding favourable results. “In our autumn statement submission to the chancellor, we called for him to introduce a five-year period of certainty, while retaining the commitment to making the policy permanent depending on economic conditions.
“We’re also looking for the government to widen eligibility to include leased assets.“
Kitty Usher, chief economist at the Institute of Directors, said: “It doesn’t make policy sense [to have a temporary regime]. Once the policy is settled, it’s pretty much all upside, because it incentivises more capital investment that we know is linked to economic growth.”
UK holds lowest corporate tax rate in the G7 group
A Treasury spokesperson refrained from providing comments regarding tax policy adjustments but did emphasise that the UK currently holds the lowest corporate tax rate within the G7 group and possesses one of the most generous capital allowance systems among all major advanced economies.
“Growing the economy is one of our top priorities, which is why we’ve introduced full expensing, an effective £27bn corporation tax cut, as well as a new £500m-a-year R&D tax credit system – both of which have led to the UK having the highest investment growth in the G7.”
Final thought
It is imperative that the government prioritises long-term economic well-being over short-term financial apprehensions. However, Jeremy Hunt’s opposition to making the corporate investment tax reduction permanent disregards the urgent need for economic recovery and stability that is echoed by the private-sector’s declining performance and the manufacturing sector’s plea for full expensing.
Extending full expensing from three to five years is a reasonable compromise to provide businesses with investment certainty.
