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Investment in the United Kingdom Increased following Pro-Investment Tax Reforms

10 min readBy: Stephen J. Entin

Key Findings

  • The UK Office of National Statistics has reported a significant increase in business investment in the UK since the adoption of two pro-investment reforms to capital cost (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. ) allowances. In the second quarter of 2023, business investment was 9.4 percent higher than the same quarter last year.
  • The latest version of capital allowances is called “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. .” It permits the immediate deduction of the full cost of eligible plant and equipment 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. . Longer-lived plant and equipment investment is allowed an immediate 50 percent deduction, with the remainder of the cost receiving the normal allowance.
  • The UK capital allowances have gone from the worst in the OECD to the best. UK investment as a share of GDP, once the worst in the Group of Seven (G7), is rising.
  • The reforms to the capital allowances are temporary, due to restrictions on permanent changes in the UK budget process. Making the changes permanent is critical to maintaining a larger capital stock, and a higher level of labor productivity and wages.
  • The reform of the capital allowances has been made more vital by an increase in the UK corporate 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 effective April 1, 2023.
  • A study by the Tax Foundation and the Centre for Policy Studies estimates that making the current expensing provision permanent would raise UK GDP, investment, and wages by 0.7 percent, 1.1 percent, and 0.6 percent, respectively. Extending the full expensing to all plant, and to other structures, would increase the projected gains by three to four times. All these reforms would involve little or no permanent cost to the government budget when the revenues from the additional GDP are factored in.
  • The recent UK experience with expensing provides a lesson for U.S. tax policy. The Tax Cuts and Jobs Act of 2017 temporarily provided full 100 percent expensing for equipment through 2022, but that provision is being phased out between 2023 and 2027. The UK data suggests that allowing expensing to expire in the U.S. will significantly reduce U.S. business investment and economic activity.


The UK economy is experiencing an upsurge in business fixed investment following two pro-growth tax changes. The UK Office of National Statistics (ONS) reported that business investment increased by a revised 4.1 percent in the second quarter of 2023 (versus a provisional estimate of 3.4 percent)—9.2 percent higher than the same quarter a year ago.[1] The earlier provisional report noted that investment had risen 3.3 percent in the first quarter and suggested that some of the investment in the first quarter may have been moved forward to take advantage of 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. ,” an investment incentive introduced for a two-year period in the 2021 budget, which was about to expire.[2] The government had not yet announced whether the capital consumption allowances (deductions for the cost of plant and equipment) would revert to prior law after the super-deduction, or whether some form of a more favorable tax treatment would be implemented. The provisional release discussed an ONS survey of businesses that found that, while some investment was moved forward, much of the first quarter investment was net new spending. A second investment incentive, “full expensing,” was introduced as a follow-up to the super-deduction, and investment continued strong.

Old UK Law

Prior to 2021, the UK had the least favorable capital consumption allowances in the OECD and the lowest level of business investment as a percentage of GDP in the G7. The result was sluggish growth in labor productivity and wages, lagging that of other developed countries.

To determine taxable profit, businesses deduct their costs from their revenues. While most costs are deducted as soon as they occur, the great exception is the cost of plant and equipment, other structures, and buildings. Most governments require businesses to deduct these costs over time, creating a tax bias against business investment.

A deduction spread over time loses value. A dollar or pound years from now is not worth as much as a dollar or pound today. The value drops at a rate equal to the real annual time value of money (reflecting the real return on capital that could have been earned had the money been available sooner) plus inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. . The longer the delay, and the higher the rate of inflation, the greater the loss in value.

The UK has two classes of equipment and plant. Under old law, short-lived assets were written off at a rate of 18 percent per year using the declining balance method. Longer-lived assets were written off at 6 percent. A £100 machine would receive an £18 deduction in the first year, 18 percent of the remaining £92 (£14.76) in year two, and so on in later years. A recent study by the Tax Foundation calculates the present value of that string of write-offs as £72. For the 6 percent assets, it is £46.2.[3] At the 19 percent tax rate in effect in 2021, if the business was allowed an immediate deduction (full expensing) for the £100 cost, it would save £19 in tax on the £100 machine. Because the present value of the write-off is less than the £100 upfront cost of the machine, the tax spared is of less value than the cost times the tax rate. The taxes spared are worth £13.7 for the 18 percent pool and £8.8 for the 6 percent pool. In effect, more of the revenue earned by the machine is treated as profit than is really the case. This raises the effective tax rate on the investment, which reduces the amount of capital formation, the level of labor productivity, and wages. As the study points out, the present values of capital consumption allowances in the UK compared unfavorably to those of other developed nations.

The Super-Deduction

In the UK Spring Budget of 2021, then-Chancellor of the Exchequer Rishi Sunak (the current Prime Minister) announced a plan to raise the corporate tax rate from 19 percent to 25 percent, effective April 1, 2023. The anticipated rate hike might have slowed investment immediately in any assets whose income would extend into the higher rate period. To prevent that, the Sunak plan instituted a super-deduction for two years, from April 1, 2021, to March 31, 2023, for outlays on plant and equipment. The super-deduction provided an immediate write-off equal to 130 percent of the initial cost of short-lived (18 percent pool) plant and equipment. Assets in the 6 percent pool were allowed a deduction of 130 percent of half their cost with the rest subject to ordinary 6 percent treatment. The resulting present values of the write-offs on a £100 asset were £130 for the short-lived assets and £88.1 for the long-lived assets. At the 19 percent tax rate, these write-offs saved the businesses £24.7 and £16.7, respectively. The values of the write-offs were larger than under old law, reducing the cost of the assets and encouraging investment. The Treasury noted that the super-deduction made the UK’s 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. regime more internationally competitive, lifting the net present value of the plant and equipment allowances from 30th in the OECD to 1st.[4]

After the Super-Deduction

In the 2023 Spring Budget,[5] Jeremy Hunt, Chancellor of the Exchequer, revealed the follow-on to the super-deduction: “full expensing,” which allows an immediate write-off of 100 percent of the cost of short-lived assets. It is somewhat misnamed because longer-lived assets are allowed to expense only half their cost, with the rest subject to the 6 percent write-off. They receive a write-off worth 74 percent of their cost in present value. At the current 25 percent tax rate, the deductions for short- and long-lived £100 assets save a business £25 and £18.5, respectively. These “full expensing” savings under the 25 percent tax rate are slightly higher than the savings provided by the super-deduction under the 19 percent tax rate, which may account for the continued elevated business investment rates reported by ONS for the second quarter of 2023.

“Full expensing” could only be enacted for three years under the UK budget process rules, and it will expire in 2026, but the Chancellor stated his intention to extend the provision as conditions permit. Making the expensing permanent would enhance its impact on investment. Businesses are more likely to enlarge their stocks of plant and equipment when they know the reduction in the cost is permanent, and that the cost of replacing the first round of investment will not rebound to unaffordable levels. Merely extending the provision on a temporary basis is second best, unless both major parties are seen to support the principle and businesses feel they can rely on its continuation.

Although capital allowances have risen for plant and equipment, the full budget package is less conducive to business activity overall than the policies of the super-deduction era because of the increased corporate tax rate. The higher rate imposes a higher burden on revenues generated by land, inventories, research and development, intellectual property, and unusual super-normal returns on plant and equipment that exceed the cost of the assets by wide margins.

Economic Impact and Budget Cost

A study by the Tax Foundation and the Centre for Policy Studies estimates the economic gains and budget costs from the limited “full expensing” provision in the Spring Budget and three suggested alternative regimes that would extend expensing to additional assets.[6]

The study found that the 2023 Spring Budget “full expensing” provision would raise GDP by 0.7 percent, investment by 1.1 percent, and wages by 0.6 percent, relative to a return to the pre-2021 law. Extending expensing to all plant and equipment was found to raise GDP by 0.9 percent, investment by 1.5 percent, and wages by 0.8 percent. Adding expensing for structures and buildings would increase GDP by 2.5 percent, investment by 2.5 percent, and wages by 2.1 percent.

The budget cost of these reforms in billions of pounds is modest and declines rapidly as old assets pass through the system and new assets dominate the deductions. In static terms (assuming no gain in GDP and associated revenue), Spring Budget “full expensing” would cost £8.4 billion at the peak year, declining to £0.9 billion in the long run. Expensing for all plant and equipment would cost £9.3 billion (peak year), declining to £1.6 billion (long run). Expensing for all plant and equipment would cost £8.4 billion (peak year), declining to £1.6 billion (long run). Expensing for plant and equipment and other buildings and structures would cost £22.6 billion (peak year), declining to £10.0 billion (long run).

An alternative to the last option would allow expensing for plant and equipment, but it would keep current asset lives for buildings and structures with write-offs augmented for inflation and the time value of money, to make them equal in present value to expensing. This approach is called neutral 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. (NCRS). NCRS would reduce the peak cost to £13.9 billion and the long-term cost to £9.8 billion.[7] All these estimates assume no economic growth. Factoring in the revenue from the added growth would turn the long-run budget effect positive.

Lesson for the U.S.

The recent UK experience with expensing provides a lesson for U.S. tax policy. Bonus depreciationBonus depreciation allows firms to deduct a larger portion of certain “short-lived” investments in new or improved technology, equipment, or buildings in the first year. Allowing businesses to write off more investments partially 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. at some level has been an on-again, off-again feature of U.S. tax law since 2002. The Tax Cuts and Jobs Act of 2017 temporarily provided full 100 percent expensing for equipment through 2022, but that provision is being phased out between 2023 and 2027. The data from the UK suggests that allowing expensing to expire in the U.S. will significantly reduce business investment and economic activity.

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[1] Office of National Statistics, “Business investment in the UK: April to June 2023 revised results,” released Sep. 29, 2023,

[2] Office of National Statistics, “Business investment in the UK, provisional, April to June 2023,” released Sep. 29, 2023,

[3] Assuming a 6.8% interest rate and 2.4% average inflation long term, for a compounded rate of 9.363 percent. See Daniel Bunn and Kyle Pomerleau, “Marginal Effective Tax Rates and the 2021 UK Budget,” Tax Foundation, March 2021, for the methodology and a more detailed discussion of present value and the resulting marginal effective tax rates on various types of investment under different capital cost recovery rules and business tax rates.

[4] HM Treasury, “Budget 2021- Super-deduction,”

[5] HM Treasury, “Spring Budget 2023,” updated Mar. 21, 2023,,businesses%20to%20invest%20and%20grow.

[6] Tom Clougherty, Kyle Pomerleau, and Daniel Bunn, “After the UK Super-Deduction: Assessing Proposals for the Reform of Capital Allowances,” Tax Foundation and Centre for Policy Analysis, September 2022,

[7] Ibid.