British businesses will be offered £27bn in tax relief over the next three years to boost company investment as the government looks to jump-start economic growth.
In his Budget, Chancellor Jeremy Hunt set out plans to make the UK “the best place in Europe for companies to locate, invest and grow” with incentives to offset the biggest rise in corporation tax in more than four decades.
Hunt was criticized by some Conservative MPs for proposing to scrap the corporation tax rate, but he sought to win over more skeptical voices by announcing a £9bn annual “full cost” of capital investment by UK companies.
The three-year tax relief – which will come into effect on April 1 – will allow businesses to deduct the full cost of the investment from their tax on profits.
Until 31 March 2026, for every £1 invested in qualifying expenditure, companies will be able to save up to 25p on their tax bill.
The fiscal watchdog, the Office for Budget Responsibility, said the policy would boost business investment by about 3 percent per year for the duration of the program.
Matthew Fell, interim director general of the CBI, said full spending would “put the UK at the top table for attracting investment and put us on the essential path to a more productive economy”.
The employers’ group has estimated that a permanent version of the scheme – which Hunt said on Wednesday he wanted to implement “as soon as we can responsibly do so” – could boost gross domestic product by 2 per cent, or up to £50bn, by 2030-31.
Meanwhile, Kitty Asher, chief economist at the Institute of Directors, a business group, said the scheme “simplifies the system, removes confusion and crucially encourages investment by reducing upfront cash flow risk”.
As the government hopes the tax cuts will reverse a post-Brexit slump in business investment, executives have warned of a negative impact of the cuts on economic growth and efforts to improve productivity.
According to government figures, business investment in the UK was 10 per cent of GDP in 2021, compared to an OECD average of 12.5 per cent.
On Wednesday Hunt backed plans to raise corporation tax from 19 per cent to 25 per cent in April, while also ending the 130 per cent “super-deduction” tax break on capital investment from 2021.
Before the Budget, business leaders warned that going ahead with both policies would make the UK one of the least competitive nations in the OECD for business investment and lobbied strongly for a replacement of the super-deduction scheme.
Under full costing, the government said the UK would have the joint highest net present value for capital allowances in the OECD, alongside countries such as the US.
Companies looked to Hunt to boost economic optimism and encourage investment in their operations at a time of concern about rising labor and supply costs and declining consumer spending.
But the Federation of Small Businesses said that despite Hunt’s announcement, small companies would still have to contend with the highest tax burden since 1948.
Martin McTague, the group’s national chairman, said that although Hunt had “high expectations to support small firms in these challenging times”, the budget would “leave many feeling short-changed” and “left behind” compared to larger firms.
Stephen Phipson, chief executive of Make UK, the manufacturers’ trade association, welcomed the government’s push to boost investment, but said companies would be disappointed by the lack of expansion to support energy bills.
