“Historically, the government has sought to stimulate capital investment through tax breaks such as capital allowances, investment allowances and tax enhanced investor incentives such as EIS (Enterprise Investment Scheme), SEIS (Seed Enterprise Investment Scheme), BES (Business Expansion Scheme). The issue with incentivising through tax breaks is that the legislation is often circumscribed with anti-avoidance legislation as HMRC fears, usually with some justification, that taxpayers will push the rules to the maximum, and beyond, in order to extract as much relief as possible. Then a view has to be taken as to what falls within what was in the contemplation of the legislators when the tax relief was introduced and what has gone too far – where is the line in the sand to be drawn between taking advantage of the incentive and unacceptable tax avoidance? The legislation can consequently become very complicated and hedged with uncertainty for taxpayers. So whilst very attractive reliefs may be available it is sometimes hard for potential investors to be confidant that a relief will be available to them because of the anti-avoidance hoops that have to be jumped through.
If in order to successfully incentivise investment in the UK through tax reliefs, the legislation introducing these reliefs should be clear and straightforward so that investors can have certainty.
Incentivisation through tax breaks is more attractive to investors when tax rates are high: corporation tax in the UK is currently 19% but is set to rise to 25% in April 2023, making tax reliefs more valuable. However, the new Prime Minster has promised to block this rise and maintain corporation tax at 19%. Whilst Liz Truss argues that maintaining corporation tax at 19% will be attractive to investors, this will devalue investment reliefs such as capital allowances.
Another option which could encourage business investment in the UK would be to introduce some form of relief from employer’s national insurance contributions (NICs) (which is currently set at 15.05%). Relief from employer’s NICs already exists in UK freeports which are special economic areas where eligible businesses can benefit from tax savings and other measures which help bolster investment. Liz Trust has indicated that she wants to increase the number of freeports significantly and the employer’s NIC relief could prove to be a strong incentive for new employers. If the government is focused on encouraging new businesses or sustaining business which are struggling, then the government could consider introducing employer’s NIC relief for the first year of start-ups or where the profitability of a business falls below a certain threshold.”