Corporate tax breaks designed to encourage companies to buy new machinery and equipment are set to cost the taxpayer around three times as much as they generate, according to analysis of official forecasts.
The tax relief on new plant and machinery announced by Jeremy Hunt as chancellor in 2023 was billed as a major part of the solution to the problem of Britain’s low economic productivity. Labour supported the measure at the time and have now promised to make it permanent.
An analysis by the thinktanks Demos and Common Wealth has found that the measure, known as full expensing, will cost nearly £30bn in lost tax revenue and spur a maximum of £10.5bn in fresh investment. The Treasury says the move will generate £15bn in investment, still only half what it has cost the taxpayer.
Andrew O’Brien, policy director at Demos, said: “Full expensing is not the silver bullet to boost business investment that some had hoped.”
A Treasury spokesperson said: “The new chancellor has vowed to lead the most pro-growth Treasury in the country’s history that unlocks wealth and opportunity in every corner of the United Kingdom, which is why we are giving businesses full confidence to invest by retaining permanent full expensing.
“Permanent full expensing is forecast to grow the economy and it solidifies the UK’s position as the joint most competitive country in the world for capital allowances.”
Under the measures rolled out in 2023, companies can offset the full cost of any new IT equipment, plant and machinery against tax.
The move was designed to boost Britain’s low investment, which has been the weakest of any G7 country for several years as a proportion of economic output. Many economists blame this lack of investment by British companies for the country’s low productivity rates, which have never recovered since the 2008 financial crash.
Lack of private investment has also been blamed for Britain’s creaking public infrastructure. Many analysts say that Thames Water’s current troubles, for example, stem from years of high dividends to shareholders and underinvestment in infrastructure.
In his 2023 budget, Hunt told MPs: “[Full expensing’s] impact on our economy will be huge … This decision makes us the only major European country with full expensing and gives us the joint most generous capital allowance regime of any advanced economy.”
The analysis by Demos and Common Wealth, however, suggests that any impact will be dwarfed by the money lost to the taxpayer.
The Treasury has calculated the move will cost it just under £11bn by 2028-29. Meanwhile, forecasts from the Office for Budget Responsibility suggest business investment will be £10.5bn higher in that year compared with the year that full expensing was introduced – not all of which is likely to be a direct result of the tax change.
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Government officials say the actual impact of the move will be closer to £15bn, suggesting investment would have fallen without it. They also add that in the long run that impact will rise to £22bn – still well short of what it has cost.
The two thinktanks are instead advocating that changes are made to corporate governance rules to encourage companies to spend less on shareholder giveaways and more on investment.
They are calling for workers to be represented on company boards and for changes to be made to directors’ legal duties, requiring them to prioritise more than just shareholder returns.
O’Brien said: “In the short term, the government will need to make a judgment about whether it is providing value for money or whether the cost could be better spent on direct public investment.
“More importantly, tax incentives must be backed up by reforms to the Companies Act to shift corporate decision making and increase investment.”