The British government has announced a two-year ‘super deduction’ to boost capital investment before a tax hike in 2023, while also rejigging the country’s freeports programme to spur development in eight locations across the country. 

“While many businesses are struggling, others have been able to build up significant cash reserves,” Chancellor Rishi Sunak said on March 3 as he detailed the government’s budget 2021 to the House of Commons. 

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“We need to unlock that investment; we need an investment-led recovery.”

From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. This upfront super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest, ensuring the UK capital allowances regime is among the most competitive in the world, the UK Treasury said.

Investing companies will also benefit from a 50% first-year allowance for qualifying special rate (including long-life) assets.

Capital investment in the British economy, as measured by real fixed investment, plummeted by more than 20% in the second quarter of 2020 at the height of the Covid-19 first wave, figures by credit rating agency Moody’s show. It bounced back in the second half of the 2020, but has yet to reach pre-pandemic levels. 

The super deductions are now expected to temporarily increase the level of business investment by approximately 10% at its peak in 2022–2023, equivalent to around £20bn per year, according to estimates by the Office for Budget Responsibility. 

While Mr Sunak believes that the new measure will make the British tax regime for business investment “truly world-leading, lifting us from 30th in the OECD, to 1st”, it will precede an announced tax hike that will raise the country’s corporation tax by 6% in 2023 to raise fresh fiscal revenues. At 25%, this will be twice as high as in neighbouring Ireland (12.5%) and higher than the US (21%), but lower than major economies on the European mainland, such as Germany (29.9%), France (32%) and Italy (27.8%), according to figures by US-based think tank Tax Foundation. 

Freeports

The government also announced the final list of the eight freeports (special economic zones) where a 100% deduction for companies investing in plant and machinery for use in the same Freeport tax sites will remain available until 30 September 2026.

In particular, as detailed by Mr Sunak, freeports will enjoy simpler planning; infrastructure funding; cheaper customs, with favourable tariffs, VAT or duties; and lower taxes, with tax breaks to encourage construction, private investment and job creation. 

The eight designated freeports are East Midlands Airport, Felixstowe and Harwich, Humber, Liverpool City Region, Plymouth and South Devon, Solent, Teesside and Thames. At the same time, the Treasury said that discussions continue between the UK government and the devolved administrations to ensure the delivery of Freeports in Scotland, Wales and Northern Ireland “as soon as possible”. 

In August, the University of Sussex’s UK Trade Policy Observatory found that freeports were “unlikely to generate any significant benefits” for the UK economy.