UK budget/BT: deductive logic

Making capital allowances exciting seemed impossible. Then UK chancellor Rishi Sunak came along. The two-year 130 per cent “super deduction” he unveiled in Wednesday’s Budget was declared to be the biggest single business tax cut in modern history. A signed tweet artfully advertised its boldness in pink and black.

Costing £27bn, the super deduction will be more than 10 times bigger than a similar measure following the financial crisis. It should trigger a 10 per cent surge in business investment equivalent to £20bn at its peak in 2022—2023.

Infrastructure may account for a lot of this, including projects such as the HS2 transport project and wind farms, says Heather Self of Blick Rothenberg. The deduction will make more difference to big businesses than small ones. But It will not apply to contracts that have already been signed, and projects with long lead times will also miss the boat. 

Telecoms group BT is one winner. Its shares have shot up 5 per cent. Its capital spending bills come to between £4bn and £4.3bn a year as it builds broadband connections and its 5G mobile network. Perhaps half of that would be eligible for the new tax break, analysts suggest.

A company spending money on machinery might at present write it down at a rate of 18 per cent a year. With the super deduction, the rate would go up to 130 per cent in the year it invests.

If £2bn of BT’s spending was eligible, it could reduce its taxable profits by an extra 112 per cent of £2bn. If it pays tax at 19 per cent, that would be worth £425m. This is close to the £495m of UK corporation tax paid in the year to March 2020, when capital allowances were less generous.

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Even if BT wiped out its UK corporation tax bill for two years it would still be hit by the rate rise to 25 per cent from April 2023. The overall impact on its net present value is negative, says UBS. For other companies too, this will be a temporary boost. It will not be long before this fiscal stimulus goes into reverse.

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