Factory Tax number one issue holding back UK manufacturing: survey

The Factory Tax is the number one issue holding back industry in the UK according to a new survey of the country’s manufacturers.

The Factory Tax is the inability to fully expense investments in machinery and buildings. It holds back growth in parts of the country that are relatively more dependent on manufacturing, such as the North and Midlands.

Under the UK’s current tax arrangements, businesses can immediately deduct expenditures on the likes of salaries and stationary. But most investment in fixed capital can only be written off over time, which fails to account for inflation and a real return on capital. This means, in real terms, firms pay a tax — a Factory Tax — on investment in buildings and machinery.

The Adam Smith Institute's latest paper, Abolishing the Factory Tax: How to Boost Investment and Level Up Britain, argues that this is contributing to Britain’s woeful productivity. Over the last decade, productivity has grown by just 0.3% and the U.K. has had the lowest level of private investment in fixed capital as a share of GDP in the G7 for over two decades. This means lower incomes and lower quality of life for Brits.

The Factory Tax is the key issue raised by British manufactures. As it stands, they can only immediately write-off a small amount of investment under the ‘Annual Investment Allowance’. A survey commissioned by industry body Make UK found that 71% of companies want an increase in investment allowances. It was the number one issue cited, followed by energy costs and R&D tax credits. But as it stands the AIA, which is £1 million this year, will automatically decrease to £200,000 at the end of the year unless corrective action is taken.  

Make UK has specifically referenced the Adam Smith Institute’s Factory Tax paper in their release about the survey.

“Low levels of private sector investment and poor productivity have been the achilles heel of the UK economy for decades,” Stephen Phipson, chief executive of Make UK has said. “One reason for this is the poor level of capital allowances compared to other countries, coupled with the inclusion of capital investment in the calculation of business rates.”

The ASI has called on the government to Abolish the Factory Tax by making the Annual Investment Allowance unlimited. This could have a huge economic impact: increasing investment by 8.1%, boosting labour productivity £2,214 per worker and moving the UK from 15th to 6th on the Tax Foundation’s International Tax Competitiveness Index. It would also help ‘level up’ the UK economy by removing the bias against industry that tends to be located in the North and Midlands — areas that the Conservatives have just won in large numbers for the first time in generations and will need to see growth in if they want to win the next General Election.

Abolishing the Factory Tax is a no-brainer for a Government that wants level up Britain and boost productivity and living standards.