The tax super-deduction is working and must stay, says IoD

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Date: 13 July 2022

A women tracks the impact of capital investment on the company's profitability

The temporary capital investment tax super-deduction has had a "positive and measurable" impact on business investment and should be made permanent, according to research by the Institute of Directors.

The super-deduction was introduced in the 2021 spring Budget to increase levels of business investment as the economy recovered from the pandemic. The two-year 130% tax super-deduction capital allowance for investment in qualifying plant and machinery is due to end in March 2023.

A poll of members by the Institute of Directors (IoD) has found that of those firms whose business depends in some way on fixed capital, 13% reported that the super-deduction had had a direct impact on the level of investment made in 2021-23 - and for half of these it was entirely new investment as a direct result of the super-deduction.

Now, the IoD is calling for the 130% super-deduction to be made permanent. Kitty Ussher, IoD chief economist, said: "The chancellor has already said he is considering using the tax system to incentivise greater business investment. Our data shows the positive impact the super-deduction has already had in doing just that. We are therefore calling for the chancellor to make it a permanent feature of doing business in Britain."

In June 2022, Office of National Statistics data reported a 0.6% fall in business investment in the first quarter of 2022. However, Ussher said: "It is wrong to look at declining overall levels of business investment in recent months and conclude that the super-deduction has not worked. Instead, our data shows that even less investment would have taken place if the super-deduction did not exist. When business confidence in the macroeconomy is low, as it is at the moment, the case for government incentives to raise investment becomes even stronger."

A poll of 500 senior decision-makers in UK SMEs conducted by Nucleus Commercial Finance (NCF) has found that 13% have increased investments as a result of the super-deduction - in line with the IoD findings. However, the results also show that 16% have decreased investments.

According to NCF, UK companies invest just 10% of GDP each year, compared to 14% in EU countries. When asked for their insight into the primary causes of this investment gap, after economic uncertainty (58%), SME leaders cited a high tax burden (34%), uncertainty in where to invest (32%) and a lack of government incentives (30%).

Chirag Shah, founder and ceo of Nucleus Commercial Finance, said: "There are a host of ways that government can really get behind business and stimulate innovation by thinking creatively. Change in Number 10 offers a chance for a reset, a rethink, and a redoubling of efforts.

"UK SMEs are ambitious and hungry to grow, but it’s incredibly frustrating for them that too often the odds are seemingly stacked against them. It is imperative that the shake-up in Downing Street results in a more impactful business strategy from the government."

Written by Rachel Miller.

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