It makes me think I’m missing something because they can’t – really, they can’t – be as stupid as I think they’re being. Sadly, they’re using the usual trick of not having the report up so that people can cehck the contentions in hte press release.
Corporate tax breaks designed to encourage companies to buy new machinery and equipment are set to cost the taxpayer around three times as much as they generate, according to analysis of official forecasts.
The tax relief on new plant and machinery announced by Jeremy Hunt as chancellor in 2023 was billed as a major part of the solution to the problem of Britain’s low economic productivity. Labour supported the measure at the time and have now promised to make it permanent.
An analysis by the thinktanks Demos and Common Wealth has found that the measure, known as full expensing, will cost nearly £30bn in lost tax revenue and spur a maximum of £10.5bn in fresh investment. The Treasury says the move will generate £15bn in investment, still only half what it has cost the taxpayer.
Profits taxes are paid on profits. Profits are revenues minus costs. Investments are a cost, therefore they get taken off revenues before profit is calculated.
What changes with full expensing is *when* you can recognise that cost of the investing. You still get to take that cost off revenue to get to profit you just have to do it later if the more normal depreciation schedules are followed.
So, net revenue loss of full expensing is zero. Unless we want to start talking about the interest cost of govt borrowing they’ve got to do while waiting for the revenue.
I think – as above, I can’t check – that their trick here is to only run hte revenue collection out a few years instead of a couple of decades. That’s how they’re able to claim lower tax revenue. But to do that would be between lying and stupid. So, clearly, they can’t be doing that.
Full expensing changes when costs are recognised, not which costs are recognised.
Or am I missing something here? Is it me being ill-informed rather than they being lying bastards?
It’s 3:00 a.m. in New York so clearly I’m not thinking clearly.
But my understanding of full expensing is just that, you spend 10 billion on new equipment and you deduct all 10 billion this year instead of deducting a billion a year for the next 10 years.
So how can the taxman have a £30 billion revenue loss if the entirety of the deduction thats being taken is 10 billion dollars (er,… ugh …cable. 10 yards of cable. 10 billion Sterling)
Nope, that’s how it works. Instead of depreciating a capital asset over n years, you can do it at the point of purchase, but you then can’t depreciate it over time as it is already booked at zero value. It also means you are liable to pay corporation tax on the value if you sell it because you have already depreciated it to zero, so you are selling it “at a profit” i.e. above book value.
Even if they’re completely ignoring that depreciation is allowable against corporation tax (I would guess that they are), corporation tax is 25% at the moment. If you invest £100k in plant/machinery, the most you can reduce your tax bill in year one by is £25k. So it’s just not possible for the deferral of income tax to be greater than one quarter of the amount invested, and certainly not three times.
I suspect what they’re doing is plucking a number out their collective arses for the amount that “would have been invested anyway” and subtracting that from the numerator while ignoring that depreciation is allowable from the denominator.
Well, Mr Tim, I think you should “curate” (as people say nowadays) a list of crooked or dishonest think-tanks: Demos and Common Wealth could be the founder members. You could make a joke for insiders by classifying Murphy as a think-tank too. Only pendants could object
The trick with partial expensing is to give the impression the capital costs will be deductable over time, then change the rules afterwards, retrospectively, once the companies have spent the money.
For example: oil extraction. Tidying up and safely capping the wells, etc is a cost, but not incurred for 20 years. So we’ll allow the deduction then. Hands on heart.
Then change the rules: no more capital allowances, no new extraction licences, you must clean up with your own money . Oh, the company just walked away, and left it to the taxpayer to clean up? Whoever could see that one coming?
How on earth can the new capital expenditure be less than the tax forgone (even if you ignore the writing down over future years)? If I buy a new tractor for £100K and expense that in year one HMRC have lost whatever tax I would have paid on the £100k, £30k ish. By definition the tax saved is only ever a % of the investment.
“But to do that would be between lying and stupid. So, clearly, they can’t be doing that.”
Of course that’s what they’re doing. In the US, there’s a requirement for them to cost out each budget measure. This was passed some time ago, so the people could see just how much their stupid programs would cost.
There’s a horizon of 10 years on that cost though. I’m sure you can figure out exactly how they’re getting around it?
Naturally, every program now pulls all the revenue forward and pushes all the costs out past that 10 year mark.
Why wouldn’t British politicians do exactly the same thing? I.e. lie.
@M
This is actually an odd case of politicians doing something sensible.
Previously, if you made £400k of profit and wanted to spend it on a new widget-making machine then you’d have to pay £100k corporation tax on the £400k of profit* and then buy the new widget widget with the remaining £300k. You could then depreciate it over the next 10 years, claiming £30k against profits each year, thus reducing the corporation tax bill in future years by £7,500 per year for a total of £75k. The advantage of that setup to the exchequer was that they get that £100k of corporation tax right away.
What Hunt did (and Labour supported) was to allow full discounting. So our company would pay £25k of corporation tax on a £100k profit in year one, but have no right to depreciate the asset over the following 10 years, so would pay £75k more over that time, taking the total paid to £100k as in the other scenario. However, what it does is leave the company with more cash, so that instead of buying the widget-maker for £300k, they could buy the widget-maker-plus for £400k and thus improve productivity. Which was the point.
What we have here are “think tanks” demanding that this is reversed in order to get MOAR TAX NOW, and it is the think tanks, not the politicians who are lying. Hard to believe, but hey, Interesting Times.
* yes, corp tax was lower when this was introduced, using current rates.
Something about windfall tax bearing companies expensing now and avoiding those huge windfall taxes, rather than later after the windfall tax has gone.
They’re ideologists. They want to change reality. But you can’t change reality, so they delude themselves that they can, just to feel good. As Thomas Sowell called it, policy based on self-congratulation.
Whether you want to call that lying, stupid or both is up to you, but what it ain’t is empirical.
dearieme said:
“classifying Murphy as a think-tank too. Only pendants could object”
Ridiculous; that would imply that he thinks.
I suspect what they are doing is looking at the short term (perhaps even the initial year), rather than the life of the assets (and taxpayer). As explained above, year one shows a large loss in tax revenue, relative to normal treatment, while years 2 through “n” show small gains in revenue relative to normal treatment, as the usual tax depreciation is not available. Over the life of the asset, the two revenue streams are equal, in nominal terms, although the time-value difference runs in favour of the taxpayer.
Of course they’re not releasing the report, because their manipulation would not withstand the scrutiny. They are relying on the press release getting the headlines and establishing the claim in the public’s mind; their actual analysis may never be revealed – and that would be their preference.
The accusation is that companies will invest more in capital equipment, instead of trying to run the factory with forty year old machines. This will indeed reduce the government tax take somewhat; but that would be counterbalanced by increased productivity arising from the new machines.