The HM Treasury has recently announced a new two-year scheme for firms investing within the UK known as a “super tax deduction.”
The tax cut will come as the biggest tax two-year reduction in Britains history
The tax deduction, which will be part of the 2021 budget, allows firms to save 25 pence on each pound they invest in any qualifying plant and machinery asset.
These assets are any assets that help a firm become more “productive” the Treasury claims, these assets include factories, lorries or even new computer systems.
This super deduction is available for firms of all sizes and in the announcement, Chancellor Rishi Sunak claims that the super deduction will be able to boost growth and jobs within the UK economy.
This is because such a super deduction will incentivise firms across the UK to expand their operations as the cost of doing so will be effectively made cheaper due to the deduction.
At the same time, corporation tax rates are set to rise in the coming financial year from 19% to 25%.
This means that a hike in the corporation tax will help the UK government receive more revenue from tax sources, thus enabling the government to begin allocating more resources towards paying back debt interest repayments.
Repaying debts is becoming increasingly important as rising inflation rates are being met with concerns about whether the Bank of England will raise the base interest rate, if this occurs, the UK government may see itself paying an additional £25 billion every month towards debt repayments.
Therefore, it is becoming increasingly important that the UK government starts making a dent in the massive national debt which has accumulated to £2.2 trillion.
However, a rise in the corporation tax may make the UK less competitive as higher taxes means that nations such as Ireland, which have a corporation tax of 12.5%, are more likely to receive foreign direct investment as firms who invest in these countries retain more profits.
This is significant as retained profits can be used to grow organically through gross investment, where additional capital is created, or, inorganically where firms purchase another firm through takeovers or mergers.
An example of organic growth is Aldi’s recent announcement of spending £1.3 billion to build a new store every week for the next two years. On the other hand, Coca-Cola’s acquisition of CostaCoffee to expand into the iced coffee market, which had a total cost of £3.9 billion, is an example of inorganic growth. Consequently, the purpose of this super deduction is to ensure that the UK remains internationally competitive as foreign firms which wish to invest in the UK, such as Siemens, can now claim this massive super deduction when expanding to reduce costs and retain more profits.
This means that firms will be incentivised to organically expand, which, creates jobs. For example, Aldi’s previous expansion is predicted to create 2000 jobs for the UK economy. This job creation can lead to higher employment in local areas, consequently, this leads to higher consumer spending in stores as newly employed workers treat themselves with their recently earned disposable incomes.
This spending leads to higher VAT revenue which can be used to offset the revenue loss the government sees when giving firms these massive tax deductions. However, because the multiplier effect dictates that money is lost in the circular flow as consumers save a portion of their new wages, the likely result is that the increase in VAT revenue and income tax revenue will not offset the loss in the tax deductions.
At the same time, once it is acknowledged that firms can also use this super deduction to innovate their productivity or production, then this new policy begins to look more grey.
Examples of firms that have innovated their productivity or production processes are Tesco and Amazon, Tesco has raised productivity through the self-checkout and Amazon has improved its production process through using robotics in its warehouses.
Both of these innovations replace workers with capital, thus increasing redundancies and potentially unemployment, especially if full factor mobility is not the case. Hence, this yields a loss in VAT revenue and income tax revenue for the government as the super deduction, which is intended to increase employment, could actually promote the mechanization of more production processes, thus placing more individuals out of work. This combined with the fact that the government has instead opted to decrease Universal Credit payments whilst increasing National Insurance tax shows that these recent austerity measures are somewhat favouring richer firms, who, due to their larger volumes of retained profits can benefit from this scheme more, over the poorest in society, which, in recent years, have been those who have suffered the most through this pandemic.
Written by Hubert Kucharski
Research compiled by Billy Ryan