Last month’s Autumn Statement was heavily focused on boosting the UK’s poor level of business investment, rightly identifying that without much higher investment, the productivity improvements required to restore the economy to meaningful growth will be unachievable.

The scale of the problem

The International Monetary Fund (IMF) has confirmed that real-term business investment in the UK was still at a marginally lower level by the end of 2022 than in 2016 and before the pandemic in 2019, while other G7 economies experienced a 14% increase on average over this period. This indicates that while the rest of the G7 has overcome the disruption caused by the pandemic and the invasion of Ukraine, the UK has failed to rise to the challenges. The extent to which Brexit is a factor in this underperformance is open to debate.

In reality, the UK’s underinvestment goes back much further. We have lagged far behind other developed economies for decades, investing an average of 36% less than other members of the G7 since 1990 according to the IMF.

The proposed solution

Several initiatives for specific industries involving ring-fenced funds were announced in the Autumn Statement, but the main measure was the confirmation that the ‘fully expensing’ capital allowance previously announced as a temporary arrangement would now be a permanent tax relief. This allows companies to deduct 100% of spending on new machinery and equipment from profits. It puts tax incentives fairly and squarely at the centre of the government’s policy to boost investment.

Will this work?

The government has recent history on using tax allowances as an investment incentive through the capital allowances ‘super deduction’, which was available from April 2021 until March 2023. This allowed companies to deduct 130% of certain capex against their profits. Office for National Statistics data, shows that the increase in business investment was only 13% in total over the two years, after factoring in the sharp drop in the quarter immediately preceding the introduction of the super deduction as investors delayed capex to take advantage later of the extra incentive. This was of course a period impacted by the pandemic and, latterly, by the Russian invasion of Ukraine.

What factors drive business investment?

Research into the motivation for business investment shows that while tax allowances are a ‘nice to have’ incentive for UK entrepreneurs, they will not be the sole catalyst for investment activity, and they are by no means the top of any business’s wish list.

Other boxes, which have to be ticked before capital projects are signed off include:

• Availability of sufficient suitably skilled local labour resources.
• Effective transport links and other infrastructure, such as affordable housing and education.
• Cost and availability of funding, an aspect currently dominated by interest rates.

Government action is essential to reassure the business community that it understands the interaction of these components in decision-making and will address its concerns.

The impact of policy flip-flopping

By far the most important issue for investment decision makers is policy certainty, or more precisely based on current and recent conditions, an excess of uncertainty. The scale of the impact of the two major cancellations within the HS2 rail project on business investment can only be imagined and may never be quantified, but it will be significant.

Incessant policy revision is an important factor in creating short-term attitudes and nullifying longer-term investment. For decades there have been endless changes in industrial strategy, regional policy, training and skills policy, and in many other areas.

The government’s own capital budgets have been raised, slashed and raised once more. Now they have been frozen in the Autumn Statement. Tax policy for business has seen numerous changes, with capital allowances, the treatment of small businesses, dividend taxation and capital gains taxes all being ‘reformed’ on a seemingly piecemeal basis. Local planning reform announcements and changes have unsettled the housebuilding and renewable energy sectors in particular.

Another negative has been the habit of successive governments involving all of the major parties to announce and keep re-announcing the same tranches of public investment, whether it is in the healthcare, transport, education, or any other sector. Business strategists have better things to do than spend their time separating the reality from the political spin.

Business investment is a long-term game

Even relatively small investment projects are long in the gestation and even longer in the delivery. Trying to drive capital spend increases with tax reliefs that only last two years, or which are announced as temporary before being made permanent only a year later, is an insult to proper business planning and development.

The clarification on the continuation of fully expensing tax allowance in the Autumn Statement is welcome, but it will be some time before we will see whether it has succeeded as a strategy.

If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.