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Rachel Reeves sought to coin a new catchphrase in her conference speech, noting “that’s the Britain we’re building”. If growth is to be ‘built by the many’ and in turn ‘felt by the many’, the Chancellor will need to unlock investment by businesses. We have identified one opportunity that could provide some with further incentive to do so.

Businesses making long-term investment decisions favour stability in the tax system (particularly for a tax incentive to act as a driver to encourage investment), and so in the main, we would hope that the Chancellor will avoid the urge to tinker too much with the regime in her upcoming Budget. The capital allowances regime has been much improved in recent years, with the previous super deduction and now full expensing, combined with a generous annual investment allowance offering good levels of tax relief on capital investment. However, we see an opportunity to take some learnings from the research and development (R&D) tax relief regimes to bring an added incentive to smaller, loss-making businesses in the form of a payable credit. 

Full expensing offers 100% tax relief on qualifying plant and machinery, which is already showing signs of encouraging businesses to have confidence to invest. Alongside this, we have had ‘R&D allowances’ (RDAs), which offer 100% tax relief on all capital expenditure, both qualifying plant and machinery, and also the structural elements of a building typically treated less favourably for capital allowances, provided the asset is used in a qualifying R&D activity. 

Whilst 100% tax relief sounds attractive, for a business making trading losses, this relief simply adds to the accumulated losses carried forward, for offset against a future tax liability once the business turns a profit. We believe there is an opportunity for the Chancellor to supplement these existing 100% reliefs, with the ability for a loss-making small or medium sized enterprise (SME) to surrender this tax relief for a payable credit, in a similar way that the R&D intensive regime for SMEs operates. 

As an example, a business could invest £100,000 in an asset qualifying either for RDAs, or for full expensing, either of which would generate a £100,000 tax deduction. Introducing a payable credit of 27% (to mirror the R&D regime), would allow a business to decide whether to convert this £100,000 tax loss into a payable credit of £27,000, generating much needed cash flow to support continued investment. 

Simplicity is achieved in this approach by leveraging legislation and rates already in place for R&D tax credits, also providing a more holistic incentive spanning both tangible and intangible investment. 

And our final ask of the Chancellor, would be that she then commit to leave the capital allowances regime untouched for the remaining parliamentary term, allowing businesses to have confidence to make long-term investment decisions that take account of the tax reliefs available.