Over on Lib Dem Voice, Gordon Birtwistle welcomes the Campaign for Manufacturing, expresses delight that the Chief Secretary of the Treasury will be the keynote speaker at the Campaign Launch, and sets out why 100% capital allowances for a fixed period of 2 years would be the single most important government initiative to boost manufacturing capacity.
Gordon Birtwistle is an engineer and, before becoming Burnley’s Liberal Democrat MP, was an employer in the manufacturing sector in the town. In Parliament he is the Chairman of the All Party Parliamentary Group (APPG) on Apprenticeships, and Treasurer of the APPG on Manufacturing.
Gordon Birtwistle sets out how the Liberal Democrats have already delivered a number of key policies to support manufacturing, but how we have to do more if we want the sector to play a key role in the economic recovery. We need to be making more in Britain, and we need pro-active policies that increase industrial capacity, and create new jobs.
The introduction of a 100% capital allowance on all capital purchases for a fixed 2 year period will encourage companies to draw on substantial cash reserves to invest in new capital assets, rather than sitting on reserves or delaying or shelving investment decisions. It provides a short term financial incentive by allowing capital investment to be paid for completely out of profits. The Treasury will see a reduced corporation tax income from manufacturers for a 2 year period, increased income after that, and increased PAYE income from the additional employment that comes from a growing manufacturing sector.
In his view, if the Government wishes to see substantial growth in the economy over the next two years it needs to show confidence in its growth programme. Adopting this measure would,he believes, give confidence to manufacturing companies to invest and we all accept investment is the key to growth. He sees this as a very critical issue and, as time is short, the measure should be introduced in the Autumn Statement at the latest if we wish to see growth in the economy over the next eighteen months.
The detail on Capital Allowances – how a 100% capital allowance would work
The current position:
The cost of new machinery for manufacturing companies is written off at 18% of value per year, with a starting 100% allowance, called the Annual Investment Allowance) on up to £25,000 capital expenditure each year.
This means that a profitable company, on investing £ 1 million in new machinery, will account for £200,500 as a business cost in the first financial year, £143,910 in the second year, £118,006 in the third year, and so on.
Assuming that the business is making £ 1 million profit before write downs of capital equipment, this means that in the first year, it will make a declared profit of £ 1 million less £200,500, which equals £799,500, and they will pay corporation tax on this money. In the second year, they will pay corporation tax on a profit of £856,090, and in the third year they will pay corporation tax on a profit of £881,994.
With the proposal for 100% capital Allowances for a fixed period of 2 years:
Capital Expenditure will be paid in full and accounted in full (a write down of 100%) in the same financial year.
This means that a profitable company, on investing £ 1 million in new machinery, will account for £ 1 m as a business cost in the first financial year, and zero thereafter.
Assuming that the business is making £ 1 million profit before write downs of capital equipment, this means that in the first year, it will make a declared profit of £ zero and they will pay no corporation tax. In the second year, they will pay corporation tax on a profit of £ 1 m, and in the third year they will pay corporation tax on a profit of £ 1 m.
The Taxman will receive the same amount of money from the business, but with the current 18% write down, the tax will be paid more evenly over many years. With a 100% capital allowance for a fixed 2 year period, the taxman will receive less money in the year when the company invests, and more thereafter.
Kick Starting Investment and Growth
100% Capital Allowances for a fixed 2 year period encourages profitable companies to invest in new machinery and increased capacity. It provides an incentive for investment, and a timescale within which that investment must be made. It brings forward company investment plans to within the 2 year period. It helps to counter risk-averse decisions to delay investment.
The effect on Government Income and Economic Growth
The Government would be offering an incentive to investment, and setting out to increase UK manufacturing capability. Government corporation tax income from manufacturing companies would tend to drop within the 2 year period, and tend to increase afterwards. Higher manufacturing capability will create new long term manufacturing jobs and boost economic growth.