The Institute for Fiscal Studies (IFS) has published, 'Full expensing and the corporation tax base'. The report discusses the new temporary full-expensing policy and whether it should be made a permanent part of the corporate tax base, concluding that if ends up being temporary it will have little or no long-run effect on the UK’s capital stock.

From 1 April 2023 the main Corporation Tax rate was increased from 19% to 25%. At the same time, the corporation tax base was narrowed through a temporary ‘full expensing’ policy which allows companies to immediately deduct 100% of the cost of qualifying plant and machinery investments when calculating profits. 

The Institute for Fiscal Studies (IFS) has concluded that the Corporation Tax base needs reform.

  • It embeds major unwelcome distortions, and these ultimately drag on productivity, economic output and wages.
  • The recent policy focus has tended to be on Capital allowances, but the treatment of financing costs is also critical.
  • The International Monetary Fund has highlighted that the ‘corporate debt bias, induced by the deductibility of interest but not equity costs for the corporate income tax, remains a key [macroeconomic] stability concern’.

Key findings

  • Corporation Tax revenue is forecast to reach its highest-ever share of national income.
  • For decades, UK corporation tax policy followed a broad pattern of rate cutting and base broadening. This pattern has now sharply reversed. 
  • For now, the Full-expensing policy has been put in place for three years to 31 March 2026. The government has stated a desire to make the policy permanent.
    • If the full-expensing policy ends up being temporary, it will have little or no long-run effect on the UK’s capital stock. 
    • It will bring forward some investment that would otherwise have happened later, but there is no obvious reason to want to distort the timing of investment in that way at the moment.
  • The design of the corporation tax base creates a range of undesirable distortions.
  • The key reason the full-expensing policy is temporary appears to be cost: the Treasury estimates an up-front cost of around £10 billion a year for each of the three years it is in place.
    • This gives a vastly inflated impression of the long-run cost of the policy. Most of the up-front cost will be recouped in future years (because full expensing is instead of a stream of capital allowances). 
    • Accounting for this, the true ultimate cost is around £1-3 billion for each year the policy is in place.
  • If full expensing is made permanent, it would bring benefits, Simplifying the tax system and removing the corporation tax penalty for equity-financed investment. 
    • However, it creates a bias towards investing in the kinds of assets that qualify (i.e. towards investing in plant and machinery rather than other assets).
    • It increases the problematic existing subsidy for debt-financed investment and makes even more unprofitable projects viable.
    • The IFS view is that, on balance, making the current policy permanent would be preferable to letting it expire, though neither is ideal.
  • Ideally, the full-expensing policy would be made permanent as part of a broader reform package that extended full expensing to all investments and changed the treatment of debt interest payments. 
  • Uncertainty is bad for investment. The government and the opposition should set out a clear long-term plan for Corporation Tax.

It is worth noting that now that the Annual Investment Allowance (AIA) is fixed at £1m per accounting year and has been made permanent, full expensing will be of no benefit to most small and medium-sized businesses as they do not have enough capital expenditure to ever need to fully utilise their AIA.

Useful guides on this topic

Capital Allowances: What's new 2023-24
What's new in Capital Allowances for 2023 and 2024? A summary of the different types of capital allowances currently available to UK businesses.

Full expensing & First Year Allowances
What is full expensing? When does it apply and what is the rate of allowance? How are disposals of full expensing assets dealt with? What assets qualify for the 50% First Year Allowance (FYA)? How do I deal with disposals of 50% FYA assets? How do I make a claim?

Capital Allowances
Guides and checklists summarising the rules for claiming tax allowances (capital allowances) on assets used by individuals and companies.

CPD: Corporation Tax Part 1: Rates and Challenges

CPD: Corporation Tax Part 2 Associated Companies

CPD: Corporation Tax Part 3 Augmented Profits & Marginal Relief

External links

IFS full report download. 'Full expensing and the corporation tax base' 



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