The UK’s landmark tax ‘super deduction’ starts this month, but compared to the tax relief and incentives offered elsewhere in Europe, experts query how big a draw it is for foreign investors looking to ramp-up in the region. 

The government’s move to kickstart an investment-led recovery comes after years of scrimping on capital allowances, and is not expected to lure foreign direct investment (FDI) away from the EU’s top investment destinations.


Announced as part of the UK budget in March, the 130% deduction for plant and machinery investments is valid for two years, and is widely-regarded as a sweetener before the company tax rate increases from 19% to 25% in 2023. 

“The UK corporate rate has consistently been below some of its main competitors, but capital allowances have been the opposite story,” says Daniel Bunn, vice president of global projects at think tank the Tax Foundation. Over the past decade, the government has limited firms’ ability to offset capital spending against taxable profits, at a time when many other countries were becoming more generous. 

This pushed the UK to a lowly 30th in the Tax Foundation’s ranking of capital allowance schemes across the 37 OECD countries. The super deduction will lift the UK to fifth place, but only until 2023 when it expires.

“If the [tax] rate goes up and capital allowances go back to what they were before the super-deduction, that would — in my view — be a pretty competitive disadvantage to capital intensive industries,” says Mr Bunn. 

The UK’s standard £200,000 annual investment allowance pales in comparison to what’s available across the Channel. Since 2015, France, which places sixth in the Tax Foundation’s capital cost recovery tables, has offered a 140–160% allowance on qualifying industrial investments. This predates pro-business reforms under president Emmanuel Macron, who is reducing France’s 33% corporate tax rate to 25% and recently halved production taxes.

Germany and Austria have temporarily accelerated the depreciation of capital assets to boost post-pandemic investment, although their policies are more modest than the UK’s.


Opinion is divided over the super deduction’s ability to attract FDI. Andy Murray, managing director at Duff & Phelps, expects it to “play a significant part in location decisions for foreign investments.” While the 25% tax rate will ultimately erode those savings, he says that might take five or six years. 

Others stress the tax hike takes the shine off the two-year allowance. “Unless capital was already earmarked or under consideration to enter the UK, I don’t think the super-deduction will turn the dial because of the relatively narrow window of opportunity to take advantage,” says Nick Evans, senior tax advisor at Baker & McKenzie.

The Tax Foundation calculates that combining the temporary deduction with the tax hike will make the UK’s capital stock lower than it otherwise would have been. It echoes comments by Richard Hughes, chair of the UK’s Office for Budget Responsibility, who believes the deduction will have a “marginal effect on the overall level of investment in the long term”.

Advisers in the EU’s top investment destinations are not worried the 130% allowance will lure prospective investors away from the bloc. Daniel Gutmann, partner at CMS Francis Lefebvre Avocats in Paris, says while it may attract foreigners making targeted investments, he does not “generally think it will be sufficient for a company to decide to establish a subsidiary in the UK, rather than France or anywhere else.”

Even in the Netherlands, which has limited firms’ ability to depreciate real-estate assets since 2019, the deduction is not considered a threat. “If your business is super heavy on real-estate and you are considering setting up shop in the UK versus The Netherlands, this restriction on depreciation could be a ‘con’ for The Netherlands. But I can’t see it being a deal-breaker,” says Evert-Jan Spoelder, a partner at Taxand Netherlands.

Better incentives

Nevertheless, in Kearney’s latest FDI Confidence Index, tax was named the most important host-country criterion for the third year running. In comparing jurisdictions, the most holistic point of reference is effective marginal tax rates (EMTR) that show the tax paid on the average company’s last unit of profit. 

The Tax Foundation expects the UK’s EMTR to drop just 0.1 percentage point with the super-deduction, but then increase 4.5 percentage points in 2023. It will make the UK the second most expensive major FDI location in Europe — more expensive than other 25% jurisdictions, such as France and the Netherlands. 

The growing importance of tech and research and development (R&D) capabilities in site-selection decisions has prompted some to query if the UK would have been better expanding its 13% tax credit for R&D expenditure by large companies. Former prime minister Theresa May criticised the government’s decision to use capital allowances rather than R&D incentives to spur investment. 

This is another area where the country is falling behind its contemporaries in the EU. The OECD’s comparison of R&D subsidies across Europe shows the UK is outdone by the Netherlands and Germany — both of which recently improved R&D incentives — as well as Ireland and Poland. 

Spain is among the most generous, particularly after including credits for R&D wages and equipment. “You can end up hitting a 59% deduction,” says José Suárez, a partner at law firm Pérez-Llorca. The best incentives, however, are offered by Paris. “When it comes to R&D, a country that is usually known for its higher corporate taxes, like France, might be attractive simply due to their special incentives,” says the Tax Foundation’s Elke Asen.