Encouraging new business investment is going to be high on the Chancellor’s agenda in next months Budget and there are two areas where we expect an announcement in addition to the previously trailed announcements on Research & Development Expenditure Credits (to increase from 12% to 13%) and Structures and Building Allowances (to increase from 2% to 3%).
Annual Investment Allowance
The Annual Investment Allowance (“AIA) was increased from £200,000 to £1,000,000 in the 2018 Budget for expenditure incurred between 1 January 2019 and 31 December 2020. Over £13 billion claims for AIA are made each year and as a proportion of overall investment the Construction sector benefits the most.
Over 80% of businesses do not invest in plant or machinery (excluding cars) beyond the AIA limit. This means the majority of businesses do not need to make any further calculations beyond determining what assets qualify as plant or machinery. These businesses can also see the impact of the AIA on their reduced tax bills at their next payment.
Building and construction are responsible for 39% of all carbon emissions in the world, with operational emissions (from energy used to heat, cool and light buildings) accounting for 28%. The remaining 11% comes from embodied carbon emissions, or ‘upfront’ carbon that is associated with materials and construction processes throughout the whole building lifecycle.
Capital investment improves productivity and efficiency. Can the UK government really afford not to maintain the AIA at the current limit at a time when all businesses are under increasing pressure to adapt and make radical changes to how they operate?
Encourage Green Technology
The government has spent years investigating the pros and cons of how best to use the tax system to influence green technology investment in buildings and infrastructure.
A study in 2008 on Enhanced Capital Allowances (ECAs) raised more questions than answers on the merits of the ECA scheme. Significant numbers of respondents were unaware of ECAs and there was no conclusive evidence that those who did (beyond CHP providers) would factor in ECAs into their investment decisions. The estimated annual 3,200kT of carbon dioxide savings that could partly be attributed to ECAs accounted for less than 1% of all UK business emissions.
In 2018, the government issued a call for evidence (“COE”) to better determine how to help businesses improve the way they use energy by at least 20% by 2030. Overlapping this COE was the government’s decision to abolish ECAs from April 2020.
The government vision from the 2018 COE was published in March 2019 and highlighted the following areas as part of its Industrial Strategy –
- Extension of minimum Energy Performance Certificate E standards to all privately rented buildings from 2023.
- Ongoing consultation for tightening standards in the rented sector (including Part L of the Building Regulations).
- A review of building emissions generally.
No new tax measures have been mentioned to either incentivise or change behaviours in green technology investment beyond 100% first year allowances (“FYAs) for EV charge points (due to expire 2023) and low/zero emission cars/goods vehicles.
With the spotlight of the world on the UK and its hosting of COP26 later this year, the Chancellor can and must do more.
If you have any questions either before, or after, the Budget on 11 March, please do not hesitate to contact us.