At the Spring Budget this year, the Chancellor replaced the super-deduction with three years of full expensing for plant and machinery – meaning a business can reduce its taxable profit by the full cost of any qualifying investment in the year they invest until the end of March 2026. A 50% deduction is also allowed for some assets including solar panels.
This was a strong statement of intent to support business investment – but it doesn’t go far enough. Businesses need long-term certainty to make the really big investments the UK needs in infrastructure, net zero and innovation.
The OBR thinks business investment will only increase overall if the measure is made permanent – it expects temporary full expensing to pull investment forward from the future that would have happened anyway and make no difference to UK capital stock in the long-run.
The CBI’s own research with Oxford Economics found a permanent full expensing policy could lead to a 21% increase in the level of business investment per year by 2030/31 (an extra £50bn a year). And that would equate to a 2% bump to GDP – £53bn higher than it would otherwise be.
There is an upfront cost to this reform, as the deduction is passed through to firms quicker, but it doesn’t cost more overall. In fact, our analysis shows the net impact on the government’s balance sheet is positive. This is because improving cash flow to businesses boosts investment, therefore profits and employment, which increases tax receipts relative to our baseline forecast.
This is about the UK maintaining its global tax competitiveness and avoiding the drop in business investment that is so crucial for growth and jobs. The UK currently ranks 16th place in the OECD for capital allowances, while tying for first place for allowances for machinery. If full-expensing expires in 2026, the UK would return to having an 18% declining balance allowance for plant and equipment. This would be a shift from a 100% deduction to a 75.8% deduction (in net present value terms), placing the UK in 30th place out of 38 countries.
Many businesses don’t have the cash to buy assets outright – and it may not make sense for them to do so if they’re only needed for a short time. For these businesses, many of which are SMEs, leasing can be greener and more efficient. That’s why we’re also calling for full expensing to be extended to include assets bought for leasing purposes. As many as 39% of members we surveyed in 2022 expected to invest more if deductions were extended to leased or rented assets.
Business investment in the UK was already lagging behind our international peers. With the constantly yo-yoing allowances and no response to incentives for green investment from the US and EU, we risk falling further behind. We need a plan that boosts business investment. And we’ve done the analysis – we know permanent full expensing can be a win all round for business, the government and the economy.