Report

After the super-deduction

This report from UK think tank the Centre for Policy Studies assesses proposals for the reform of Capital Allowances.

For many years, the UK has adopted a strikingly ungenerous approach to capital cost recovery – the ability of firms to write off investment against tax. This has coincided with consistently low levels of business investment.

• The government has considered making the system of capital allowances more supportive of investment and published a number of reform options in March’s Spring Statement.
• Based on our original economic modelling, each of the reform options outlined by the Treasury would reduce marginal effective tax rates on new investment and boost investment, wages, and economic growth.
• Their most ambitious option – a watered-down version of full expensing for plant and machinery – would have the greatest impact, increasing long-run GDP by 0.7 percent.
• Going beyond the Treasury’s initial suggestions by extending genuine full expensing to structures and buildings would more than triple the economic impact of capital allowance reform, boosting long-run GDP by 2.5 percent.
• The government should be as bold as possible when it comes to permanent reform of capital allowances. High up-front revenue losses should not necessarily be prohibitive, given their transitory nature, and can be reduced using an approach known as neutral cost recovery.