Jeremy Hunt has launched a flurry of tax breaks to encourage investment by businesses after the double blow of microchip designer Arm opting for a New York stock market listing and AstraZeneca deciding to build a new factory in Dublin.
Businesses that invest in IT equipment and machinery will be able to claim back the cost by writing it off against tax on their profits, the chancellor announced in his budget on Wednesday.
Called “full expensing”, it will allow firms to claim up to 100% of the cost of the investment. The step comes amid a long-term slump in British business investment, and criticism from some Conservative MPs that a rise in corporation tax from 19% to 25% in April will damage the economy.
Britain’s biggest drugmaker AstraZeneca announced last month it would build a £320m factory in Dublin, rather than north-west England where it has other sites, because of a “discouraging” tax rate. Earlier this month, the Cambridge-based Arm Holdings, which is owned by Japan’s SoftBank, said it would not pursue a London stock market listing this year, opting instead for a US-only listing that could value it at more than $50bn.
The expensing measure is less generous than the one it replaces, the superdeduction, which allows firms to claim back 130% on investment on areas such as machines for manufacturing, but companies can benefit from it more quickly.
The measure is also due to last only three years, with the possibility of renewal, and is expected to cost the government £10.7bn a year by 2025. Its short-term nature was criticised by campaign groups and policy experts.
“The chancellor made the tough choice to increase corporation tax; for firms this is a bitter pill to swallow. And so we are pleased to see he is providing some support to businesses with a new temporary capital allowance scheme,” said Chris Hayward, the policy chairman at the City of London Corporation.
“However, further work will be needed if we’re to unlock significant investment,” he added.
The government’s spending watchdog, the Office for Budget Responsibility, predicted the measure would cause investment to “rise strongly” for two years after the UK economy shrinks by 0.2% this year. “Investment then falls back after the measure expires in April 2026,” it said.
Economists said there might be limited benefit from full expensing if it ended in three years.
“The new full-expensing investment incentive will give firms confidence to invest and grow, though the uncertainty caused by the looming increase to corporation tax may undermine the stability needed for investment planning,” said Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales.
Sam Richards, a founder and the campaign director of pro-growth campaign group Britain Remade, said full expensing would “boost investment” in areas such as offshore wind and solar, but criticised its relatively short time limit, saying “investments require planning”.
“Businesses need to know they can rely on investment reliefs being there in three years’ time. This matters when a manufacturing business is looking at updating their machinery or a company is planning to invest £100m in renewables and clean technologies; this is why the chancellor should move quickly to make the new system permanent,” Richards said.
Hunt also tried to defuse a row with big drug companies over the price the NHS pays for medicines. The UK drugs regulator, the Medicines and Healthcare products Regulatory Agency (MHRA), will receive £10m in extra funding over two years to allow faster drug approval systems from 2024, speeding up access to treatments already approved by trusted international partners and new technologies such as cancer vaccines.
The measures come as Britain’s share of global clinical trials has declined. Richard Torbett, the chief executive of the Association of the British Pharmaceutical Industry, welcomed the tax measures and MHRA funding boost, but called for a new voluntary pricing scheme that would “help build on the chancellor’s vision for a globally competitive, high-growth UK”.
The chancellor also announced changes to research and development (R&D) tax credits worth £500m a year for 20,000 businesses. The scheme allows companies to claim back part of the money spent on R&D expenses but favours bigger firms. From 1 April, the rate of the R&D expenditure credit for large companies will be increased from 13% to 20%.
Loss-making hi-tech small- and medium-sized firms will also receive further support. Eligible companies will receive £27 from HMRC for every £100 of R&D investment. This is a part rowing-back from the previously announced reduction in the R&D benefit for smaller firms.
However, Jenny Tragner, the director and head of policy at the UK’s R&D tax relief consultancy ForrestBrown, said: “Applying the more generous rate only to loss-makers risks penalising businesses once they become successful.”