51.The coronavirus crisis has had a profound effect on many business sectors. Some have done much better, while some have been required to close by law. The Government has responded by offering various forms of support for business. In some cases that support has been made available through grants and loans; in others it has been offered through the tax system:
52.We consider below two further options which the Government could use to do more now to help the self-employed and limited companies through the tax system.
53.The tax system already has within it a way to, in part, cushion the impact of losses suffered by firms due to the crisis, known as the “loss carry-back”. This allows a company to offset current losses against previous profits, thereby allowing for repayments of Corporation Tax. These arrangements also allow for unincorporated businesses to offset losses against profits made in the previous tax year.
54.At previous times of economic crisis, such as in 1991 and 2008, the Government of the day extended the carry-back period over which present losses could be offset, by introducing a temporary three-year loss carry-back. This was intended to support companies and self-employed people by generating tax repayments to people who were making trading losses during the crisis when previously they had been profitable, by increasing the period of tax years over which losses could be spread.
55.Introducing a similar three-year loss carry back now would allow losses made during the pandemic to be set against up to three previous profitable years, generating a tax refund. Annie Gascoyne, Director of Economic Policy at the CBI, said that such a temporary increase to the period for loss carry-back “would give those firms that have struggled through the crisis from a cashflow perspective, and which are now potentially saddled with higher levels of debt, a vital cash injection to then grow and invest out of this crisis.” Chris Sanger, Global Government Leader at Ernst and Young, and Chair of the Tax Professionals Forum, said:
One real benefit of a loss carry-back for those three years is that you are supporting businesses that have made profits here in the UK and, indeed, have paid tax here. It fits with the mantra of supporting those who have contributed to the UK. A three-year loss carry-back seems to be a very sensible approach.
56.We recommend that the Government should do as its predecessors have done during previous crises and support businesses by introducing a temporary three year loss carry-back for trading losses in both incorporated and unincorporated businesses. This would help those businesses which have shown that they are previously profitable recover from losses imposed on them by the impact of the pandemic.
57.During the pandemic business investment has fallen. The Office for Budget Responsibility said in November 2020 that business investment had fallen 27% in the second quarter, and recovered only slightly in the third quarter, with investment still 20% down on its level at the end of 2019. The OBR expected it to fall again in the fourth quarter.
58.Capital allowances are one way to encourage business investment. They provide tax relief for purchases of assets for use in a business but do not normally allow write-off of the entire cost of an asset at the time it is purchased. We were told that the tax system could help investment and growth in businesses by allowing increased capital allowances. Tom Clougherty argued for “full expensing”, telling us that “letting companies write off their capital expenditure in full and immediately … would be one of the best ways to boost growth through the tax system.” However, he went on to note that “in the short term, it could cost an awful lot of money depending on how exactly you implement it”.
59.At present, the UK tax system has a more targeted measure than the wholesale reform described above. Companies can benefit from an Annual Investment Allowance (AIA) which was first introduced in April 2008, and which provides tax relief for 100% of the expenditure on most plant and machinery. The relief is subject to an annual limit, which was increased from £200,000 to £1m on 1 January 2019. When it was first announced, the increase was described as temporary and was due to end on 31 December 2020, but on 12 November 2020 it was announced that the increase would be extended to 31 December 2021. The Financial Secretary provided the following three reasons for this extension, stating that it would:
60.It was suggested to us that the increase in the allowance should be extended. Anita Monteith, Senior Policy Adviser at the Institute of Chartered Accountants in England and Wales (ICAEW), said:
“The annual investment allowance for plant and machinery is currently available on £1 million-worth of investment up until the end of this year, and then it drops back down again. Everybody is asking the Chancellor to keep it at £1 million, possibly even looking for more ways to encourage people who have cash, and there are not many of those at the moment, to spend. We want to grow the economy, rather than tax it to death.”
61.In its written evidence, the Chartered Institute of Taxation made the point that continued uncertainty about the relief is damaging:
“Tinkering constantly with rates and allowances in unexpected ways undermines the principles of stability and certainty that taxpayers need, and reduces the international competitiveness of the UK’s tax system. For example, in just over ten years, the level of Annual Investment Allowance (AIA) has changed five times, to amounts ranging from £25,000 to £500,000. The right level for AIA is a matter of political judgment but it is damaging if it is repeatedly altered, and causes complexity where a business’s accounting period spans changes in the AIA.”
62.The Annual Investment Allowance is valued by business and it appears well targeted to promote growth in small and medium-sized enterprises. As with all tax reliefs there is likely to be some deadweight cost; but we urge the Government to look favourably on further extension and possibly permanency at the existing level, which would provide welcome certainty to small and medium-sized enterprises.
53 , accessed 18 February 2021
54 GOV.UK, , accessed 13 February 2021
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56 HC Deb, 13 March 1991 [Commons Chamber]
57 HC Deb, 24 November 2008, [Commons Chamber]
60 Office for Budget Responsibility, , CP318. Para 2.50
61 , www.gov.uk, accessed 18 February 2021
62 “Full Expensing” would allow businesses to immediately deduct the full cost of certain capital expenditure.
65 , www.gov.uk, accessed 12 February 2021
66 This change was announced at Budget 2018 on 29 October 2018. HC Deb, 29 October 2018, [Commons Chamber] and HM Treasury, 29 October 2018, paragraph 3.22 page 44.
68 HC Deb, 12 November 2020 , [Commons written ministerial statement]
69 Institute of Chartered Accountants in England and Wales () paragraph 7.4