Chancellor George Osborne announced in his budget last week that he was reducing the taxes on business investments by doubling the annual investment allowance (AIA) to £500,000 tax-free until at least 2015.
The AIA was raised to £250,000 back in 2012 in a bid to tackle chronic under-investment by UK firms and the Chancellor said this year that he was listening to the calls of business groups by doubling the sum available.
Mr Osborne said that the upfront credit was designed to encourage firms to prioritise “investment in the future” and that 99.8 per cent would pay no upfront tax when they use funds for investment as a result.
Under-investment by firms is seen as a chronic weakness of the UK economy. Last year The Economist magazine produced a table showing that the UK ranked below Mali, Paraguay and Guatemala in this regard. The attempt to address this through the allowance is set to cost the Treasury £2bn and comes alongside a whole package of support for businesses.
Amongst the measures announced were that business rate discounts and enhanced capital allowance will also be extended in enterprise zones for another three years, while other moves already slated include bringing corporation tax down to 20 per cent in 2015.
Meanwhile, firms in premises with rateable values of up to £50,000 will get discounts worth £1,000 off their bills for the next two years while businesses moving into vacant high street properties will benefit from a 50 per cent discount.
In some areas, business rates exceed rentable values, which has led to the business lobby calling for the system of calculation to be torn up.