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Temporary Full Expensing Arrives in the UK

6 min readBy: Tom Clougherty, Kyle Pomerleau, Daniel Bunn

At his Spring Budget on Wednesday, British Chancellor Jeremy Hunt announced the introduction of a form of full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. in the UK. Firms will benefit from a 100 percent up-front deduction for most investments in plant and machinery, with certain ‘integral features’ and ‘long life items’ subject to a 50 percent first-year deduction instead. The introduction of full expensing will coincide with an increase in the headline corporation taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate from 19 percent to 25 percent.

Crucially, while the rate increase is a permanent policy change, full expensing is time-limited and will expire in 2026—although Hunt twice signaled his intention to make full expensing permanent ‘as soon as we can responsibly do so.’ (The temporary nature of the tax reform is primarily designed to help the British government meet its fiscal rules, which set limits on the budget deficit and government debt at the end of a rolling five-year forecast window.)

Historical Context

For the past decade, British corporate tax reform gave with one hand but took with the other. The corporate tax rate fell from 30 percent in 2008 to 19 percent in 2018. At the same time, writing down allowances (depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. deductions) for plant and machinery were reduced and the deduction for structures was withdrawn altogether. As a result, the effective marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. on new investment fell by 3 percentage points and the overall effective tax rate on corporate profits did not seem to drop at all even as the statutory rate fell by more than a third.

The UK was left with one of the most miserly approaches to ‘capital cost recoveryCost recovery is the ability of businesses to recover (deduct) the costs of their investments. It plays an important role in defining a business’ tax base and can impact investment decisions. When businesses cannot fully deduct capital expenditures, they spend less on capital, which reduces worker’s productivity and wages. ’ of any OECD country. As measured by the International Tax Competitiveness Index, it ranked 33rd in this category in 2021.

The continued trade of lower statutory rates for less generous capital allowanceA capital allowance is the amount of capital investment costs, or money directed towards a company’s long-term growth, a business can deduct each year from its revenue via depreciation. These are also sometimes referred to as depreciation allowances. s began to reverse about five years ago. The corporation tax rate was legislated to fall again to 17 percent in 2020, but that was abandoned as part of the political shifts that followed the 2016 referendum on leaving the European Union. A new structures and buildings allowance was introduced in 2018 and made more generous in 2020, but still only allows a 3 percent straight-line deduction.

The reversal continued in 2021 when then-chancellor Rishi Sunak announced that the main corporation tax rate would rise to 25 percent in 2023. He also introduced the so-called ‘super-deductionA super-deduction is a tax deduction that permits businesses to deduct more than 100 percent of their eligible expenses from their taxable income. As such, the super-deduction is effectively a subsidy for certain costs. This policy sometimes applies to capital costs or research and development (R&D) spending. ’—130 percent tax relief on most investments in plant and machinery made between 2021 and 2023. While this package of measures improved investment incentives in the short term, it also created a significant corporate tax cliff edge in 2023, and it risked creating a whiplash effect on investment activity.

Sunak’s corporate tax increase was cancelled in September 2022, reinstated in October 2022, and confirmed this week. It will take effect on April 1. Yet until Wednesday, businesses did not know what (if anything) would replace the super-deduction. The baseline assumption was that the UK would revert to the underlying (and ungenerous) system of writing down allowances. Wednesday’s full expensing announcement supersedes that, but there is still uncertainty about how the corporate tax system will treat investment when it expires.

Alongside these changes, the annual investment allowance (AIA)—which essentially allows full expensing of all plant and machinery up to a specified limit—has variously been set at £50,000; £100,000; £25,000; £250,000; £200,000; and £1m since 2010. It is now set at that highest level on a permanent basis, meaning that for 99 percent of businesses, full expensing is already a reality.

However, as Britain’s Office for Tax Simplification has pointed out, the roughly 4,000 companies that make qualifying investments in excess of £2m a year are responsible for more than 80 percent of all such expenditures. This means that the tax treatment of capital investment that falls outside the AIA is particularly important to Britain’s economic performance.

Analysis of the UK’s ‘Full Expensing’ Policy

The reforms to capital allowances announced this week would have a powerful impact on the incentive to invest in qualifying assets. This is because expensing effectively eliminates the tax on marginal investments. Under expensing, the tax value of a capital allowance (the cost of the investment times the tax rate) fully offsets expected tax payments on that asset’s returns (returns times the tax rate) in present value.

Higher investment will eventually increase the size of the productive capital stock, which will translate into higher labor productivity, higher wages, and higher output. Table 1 shows that if expensing for new investments in plant and machinery were made permanent, the capital stock would be 1.5 percent larger, GDP would rise by 0.9 percent, and wages would be 0.8 percent higher.

The economic benefit of this reform is meaningful but limited for a couple of reasons. First, only a portion of plant and machinery qualifies for the full upfront deduction. Assets in the 6 percent pool only receive a 50 percent upfront deduction. Second, the proposal excludes structures, which make up more than half of the UK’s nonfinancial corporate capital stock. If expensing were extended to all assets, the UK’s capital stock would grow by 5.7 percent and output would rise by as much as 3.4 percent in the long run.

It is also important to emphasize that these estimates assume that the budget’s policies are permanent features of the British tax system. If expensing expires after three years, as outlined in the budget, the long-run impact would be nil.

Nonetheless, a short-run impact is possible because businesses may choose to adjust the timing of investments that they already have planned. As the Office for Budget Responsibility describes, this policy change is forecasted to increase investment by about £6 billion per year on average over the next three years. Afterwards, investment is predicted to fall relative to the baseline, leading to no long-run impact on the capital stock.

Table 1. Economic Impact of Permanent Expensing for Plant and Machinery
GDP Capital Stock Wages
Permanent full expensing for the main pool and 50 percent for the special rate pool +0.9% +1.5% +0.8%

Source: Authors’ calculations; the modeling approach is described here.

Another way to look at the impact of the reforms is through the lens of the International Tax Competitiveness Index. The UK ranked 26th overall and 10th on corporate taxes in the 2022 version of the Index. But with the headline corporation tax rate rising, and absent a replacement for the super-deduction, the UK would have fallen to 33rd overall.

However, expensing blunts that reduction in competitiveness, leaving the UK at 29th relative to the results from 2022. Expensing also places the UK among the top countries that provide this ideal treatment of capital cost recovery for machinery.

Table 2. Rank on the International Tax Competitiveness Index
Overall Rank Corporate Tax Rank
2022 International Tax Competitiveness Index 26 10
2023 Spring Budget 29 27

Source: Author’s calculations based on the International Tax Competitiveness Index methodology described here.


The UK’s adoption of full expensing, albeit in a time-limited and targeted form, is a welcome step that may generate short-run economic benefits. However, for the tax reform to have a meaningful effect on the UK’s international competitiveness and long-run economic performance, it must be made permanent—which the British government has said it hopes to do.

If full expensing remains only a temporary measure, any short-run gains are likely to reverse once the tax reform expires, and the long-run impact will be effectively zero. Without greater certainty about the future of capital cost recovery in the UK, businesses are left facing another corporate tax cliff edge in three years, and the outlook for the UK’s international tax competitiveness remains negative.

Nevertheless, for now, the UK has one of the most attractive tax regimes in the world for businesses making investments in plant and machinery. If the British government can build on this by making full expensing permanent and pursuing further pro-growth tax reforms, it could unlock significant long-run increases in investment, output, and wages.

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