What does a 130% capital allowance for companies mean?
On 3rd March 2021, the UK’s budget was announced by the Chancellor of the Exchequer, Rishi Sunak. One of the components of the budget is a 130% capital allowance on plant and machinery investments from 1st April 2021 until the end of March 2023. With this introduced, it means that for every pound a company invests, their tax is cut by 25p during this period. The budget also states that this policy will move the capital allowance regime from 30th to 1st in the OECD.
First, let us unpick what this all means. A capital allowance is where businesses claim back investments against their taxable profits. For instance, a company may invest money into new machinery and deduct this from their taxable profit. In essence, it reduces their tax and encourages companies to invest, therefore making them more competitive. The 130% capital allowance means that if a company were to invest £100,000 in plant and machinery, they could deduct £130,000 from their taxable profits.
The current UK corporation tax rate is 19%, and once the super deduction tax ends in 2023, the corporate tax rate will rise to 25%. It is important to note that this increase is not for all companies. If a company has profits of £50,000 or less, it will continue to be taxed at 19%, around 70% of companies in the UK. Companies that have profits between £50,000 and £250,000 will have a tapered tax rate, so it is only the most prominent companies with a tax rate of 25%. This is around 10% of all companies within the UK. Rishi Sunak states that the rise will maintain the UK as having the lowest corporate tax rate in the G7. Yet, others have argued that this is unambitious, that the government have abandoned hope of having the lowest in the G20 as per a decade ago.
For those companies who will be taxed 25%, the returns on investment will not increase at the same rate as to prior the capital allowance rate changes. The idea for businesses is that the increase in capital allowance will offset the corporate tax rate rise. However, this future corporate tax rate may put larger firms off increased investment. This is perhaps one reason why MAKE UK surveyed 149 companies and found that 28.1% were planning on bringing forward their investments, whereas 48.6% expect to make no changes. The same survey found that 55.3% of companies say it will have no impact on their investment plans.
Before the budget announcement, MAKE UK released a publication with their wishes for what they hoped it would contain. They discussed how the manufacturing sector had faced a difficult time due to the COVID pandemic and adapting to a new trading relationship with their biggest export market, the European Union, due to Brexit. Both of which have created further complications than anticipated. There is a strong focus on the manufacturing sector seeking long-term investment and support from the government. It looks as if the budget that has been announced has just fallen short of what MAKE UK wanted. The manufacturing sector has seen the second most job losses behind the hospitality sector due to the pandemic. MAKE UK reported that 45.4% of companies wanted increased investment allowances on capital expenditure, which has been granted.
The 130% capital allowance is significant to manufacturing companies due to them being a heavy capital sector. I think it is also critical to understand that the capital allowance increase for the next couple of years is not designed to overhaul the economy completely. It is instead intended to allow smaller companies to recover from covid. It is another matter to analyse the capital allowance rate and corporate tax increase for larger companies in relation to the UK being internationally competitive. MAKE UK also considers how if the UK wants to see greater growth in the manufacturing sector, greater engagement is required from the government. More needs to be done for long-term growth within the manufacturing sector if the UK wishes for sustained growth in this area instead of short-term initiatives such as this.
MAKE UK did conclude in their March 2021 summary that the announced budget will let manufacturing companies recover from the previous year’s shocks. The announcement has resulted in over half of companies either investing further or bringing their investments forward. This means that the short-term increase in investment and recovery for SME’s, which was hoped the budget would bring, looks to be on course so far. With the vaccination programme well underway and the budget announcement, confidence appears to be growing in the manufacturing sector amongst many.
– William Ellison – University of Liverpool Master Student and Marketing Intern at CNC Robotics