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Full Expensing to Be Made Permanent in the United Kingdom

3 min readBy: Alex Mengden

In his Autumn Statement released today, British Chancellor Jeremy Hunt announced that 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. for (some) plant and machinery will be made permanent. This is good news for capital investment in the United Kingdom, since permanence gives investors a reliable expectation of low cost of capital and reduces the 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. bias against long-term investments.

The policy will likely raise GDP by 0.9 percent, investment by 1.5 percent, and wages by 0.8 percent, relative to a return to the pre-2021 law.

In contrast, the expiration of full expensing in 2026 would have forfeited these gains by returning to one of the OECD’s least competitive 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. provisions. Future budgets can build on this crucial step forward by extending full expensing to all plant and equipment.


Under the old UK system before 2021, plant and machinery were depreciated in two “pools”—an 18 percent pool and a special 6 percent pool (which pool depended on the expected economic life of the asset). Assets in each pool were depreciated on a “declining balance” basis. Companies were required to add the value of new plant and machinery to these pools. Then the total value of the pools was deducted at the pool’s rate.

In 2021, the United Kingdom introduced the 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. of 130 percent for some machinery and equipment, transforming the UK’s cost recovery provisions from one of the worst to the best. The 2023 Spring Budget eventually phased the super-deduction into full expensing while increasing the statutory corporate tax rate from 19 to 25 percent.

Full expensing lets businesses deduct the full cost of machinery investment from their tax bill in the same way they deduct wages. Under current rules, firms benefit from a 100 percent up-front deduction for most investments in plant and machinery. However, certain ‘integral features’ and ‘long life items’ (assets in the former 6 percent pool) are subject to a 50 percent first-year deduction instead.

Economic Impact and International Comparison

Full expensing has different short- and long-run costs. In 2022, the Tax Foundation and the Centre for Policy Studies estimated a “peak-year cost” of expensing at £9.3 billion with a long-run cost of £1.3 billion.

As was explained in that piece:

It is important to note that changes to cost recovery can impact revenue more in the short run than in the long run. This is because new assets will qualify for the new, larger deductions while old assets will continue to be deducted under the previous regime. Over time, the cost falls as old assets under the previous regime are retired, leaving the much lower annual cost of accelerating deductions on new investment.

Other model simulations by the Tax Foundation and the Centre for Policy Studies estimate the economic gains and budget costs from permanent full expensing and find that it would increase GDP, investment, and wages in the long run, though these would be limited by the restriction on qualifying assets to the 18 percent pool. Assets in the 6 percent pool only receive a 50 percent upfront deduction.

As the Office of Budget Responsibility notes, leaving the provision temporary would have increased annual investment in the UK by £6 billion on average until 2026, followed by a subsequent decrease below the baseline. The response of businesses to the temporary policy would have been largely driven by shifting investments in time, leaving the long-term capital stock and GDP largely unchanged.

When viewed through the lens of the International Tax Competitiveness Index 2023, this reform sets the UK apart. Today’s statement keeps the UK as one of four OECD countries that offer full expensing for most machinery and equipment. In contrast, a return to the pre-2021 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. regime would have made the UK the seventh-least-generous country for plant and machinery capital allowances in the OECD, with a net present value of around 75.9 percent, compared to a current OECD average of 84.3 percent.

Among the 38 OECD countries in the Index, permanent full expensing prevents the UK from falling three places from its current rank of 30th to 33rd overall and from 28th to 31st in the corporate category. In the subcategory of cost recovery—i.e., provisions that determine the ability of firms to deduct the cost of investments from taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. —the UK would have dropped from its current rank of 19th to 34th, about where it was in 2020.

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