We’re going to get the idiots coming out on this one:
Rishi Sunak plans massive business tax breaks to spur investment
It’s really not a business tax break. It affects cashflow, yes, brings forward investment spending, probably, but it’s not a tax break. The same amount of tax will be spent over time.
Move would enable companies to deduct costs of technology, machinery and industrial premises from bills
And there we have the Telegraph subs already being idiots. A business can – and does – already deduct the costs of technology, machinery, industrial premises from their bills. For they are costs of doing business, d’ye see, and profits taxes are calculated upon profit – the amount left over after we’ve deducted costs from revenues.
Rishi Sunak is considering a multi-billion pound tax cut to encourage big companies to invest in machinery and factories as part of his bid to jump-start the economy after the damage wrought by Covid-19.
It’s not a tax cut, It’s a movement of the tax bill in time.
The Chancellor is understood to be studying plans to give firms a full tax break on capital investment, such as technology, machinery and industrial premises, allowing them to immediately deduct the costs from their bills.
It’s not a sodding tax break.
So, just to lay it out for the truly hard of understanding – like, perhaps, every other journalist in the country.
Corporation tax is a tax upon profits. Profits are what is left over after costs have been deducted from revenues. So, all costs are allowable. Well, OK, a couple might not be, in the American system at least business entertainment over a certain amount isn’t. In the UK I think you can only spend £50 per person on the office Christmas party, more than that isn’t allowable. But building a factory, developing a technology, buying a machine, those are all allowable.
Except, these are investment. So, if we buy paper to print off the powerpoint dreariness then that’s a current expense and comes off revenue this year before we calculate the corporation tax bill on the resultant profits. If we buy a machine then the machine will be around for some years and we on;t let them do that. We do it this way instead:
Therefore, we can imagine this scenario. The Worstall and Trotter Ltd transport combination decides to purchase a new lorry for £100,000 in order to ship remarkably cheap goods around the country. Turnover in any one year is £1m and there’s a £100,000 net profit on that (yes, obviously, entirely made up numbers).
So, our £100,000 on a lorry is an expense of the business that year. So, instead of there being a £100,000 profit, expenses equal revenues and thus there’s no profit, no corporation tax is to be paid, right?
And if we didn’t have tax laws about this sort of thing that is exactly what would happen. But we do have tax laws about this sort of thing. Only current expenses can be written off in full in their year of purchase. Wages, rent and the all important gaffer tape are indeed just expenses to be deducted from revenue.
But things which are going to be used by the business for a number of years are not. These are called capital investments. And you only get to write them off over the likely life of said asset. For the very simple reason that the taxman would like to have money today.
If we imagine that the lorry will last four years (what with Rodney and his gear changes, about right) then we’re allowed to write off 25 per cent each year (it gets very much more complicated, with normal accounts different from tax accounts).
So, instead of our four-year accounts saying profits of £0, £100,000, £100,000, £100,000, our four-year accounts now say £75,000, £75,000, £75,000, £75,000.
This is not, as the mathematically inclined will note, a large change in the total amount of profits. Assuming that the tax rate is the same in each year it’s also not a large change in the tax bill being paid. Like as in large meaning none.
All our stuff about capital allowances, depreciation and all that, is a method of government getting more of the tax bill now, less in the future. It doesn’t change the tax bill at all. And a move to 100% expensing – that is, the full capital allowance is available in year one – is not a tax break either, it doesn’t change the amount of tax paid.
Because we already allow companies to claim back the costs of investing in stuff. Therefore allowing them to claim back the cost of investing in stuff ain’t a new tax break.
Now, it is true that there are drooling morons out there – summat called Farnsworth for example – who think that capital allowances are subsidies. He even managed to persuade idiots like Aditya Chakrabortty that this was so. But as we’ve pointed out before this ain’t so.
100% capital allowances, full expensing, sure, they’re a good thing to be doing. It will draw forward some amount of investment by business because cash flow does matter. This will be good for economic growth because Y = G+I+C etc etc. We are in a period where we’d like to boost demand and increasing I does that nicely and so off we go.
But it’s still not a tax break. There will be ginger beer and secret handshakes for those who can report in stories which get this wrong. I’d expect the Guardian and Indy comment pages to be full of it – but then were that not true?