3.2.2  Capital allowances

468.  Capital allowance policy in the UK is focused on boosting business investment and economic growth. The right tax incentives can change the narrative for all businesses from risk mitigation to opportunity capture from net zero.

469.  The UK has recently taken steps to help incentivise businesses to make new plant and machinery investment for the period 1 April 2021 to 31 March 2023 via:

•  a super-deduction tax providing allowances of 130% of the qualifying cost on investments that ordinarily qualify for the usual 18% main rate writing down allowances

•  a first-year allowance of 50% on other asset investments that usually only qualify for 6% special rate on writing down allowances

470.  While more broadly, the Government's allowances policy is fairly competitive when accounting for measures such as the annual investment allowance, HMT should be monitoring the competitiveness impacts of its capital allowances regime during the next year.

471.  Businesses have welcomed the super-deduction, with more than half of firms (53%) planning to claim the super-deduction; 20% of the qualifying capital spend is seen as truly additional by firms.336

472.  In the short term, there is a strong financial case for business investment to take advantage of the super-deduction policy window before the impact of inflation further adds to the cost of that investment. However, longer term support for investment decisions is necessary to create a sustainable investment environment (see Pillar 1). The Government should be considering how best to use the tax system, for example via a super-deduction policy or similar, and other capital allowances, to achieve growth and decarbonisation. We have heard example tax measures from businesses to support this:

"[We] would recommend an extension of the targeted system of First Year Allowances (FYAs), to include enhanced benefits for investments which would additionally support the government's policy objectives relating to net zero and productivity. For example, this could include plant and machinery which contributes to industrial energy efficiency/energy management and productivity enhancing investments in industrial digitalisation." - ABB Ltd337

473.  We recommend HMT, as part of a wider review, consider a successor to the super-deduction tax relief with a focus on increasing investment in low-carbon technologies as the super-deduction is due to end in March 2023.