During last night's leaders' debate on the economy, Brown and Cameron clashed on manufacturing investment and capital allowances.
Capital allowances are incredibly vital to manufacturers' competitiveness. They are how the tax system reflects the cost of investing in new machines. So while the staff costs count as an expense that immediately reduces the amount of tax a company pays, investment costs are only counted as an expense over 30 years.
On average, manufacturers replace their machines every 7-8 years, which means the tax system artificially adds to the cost of investing in machinery in the UK.
The Conservative Party is likely to reduce the level of capital allowances from 20% to 12.5% - which means the tax system will take 53 years to reflect the cost of modern machines.
On it's own this proposal would be extremely damaging to manufacturers' competitiveness. Consequently, EEF have been raising this issue with the Conservative Party for the past year, and have been working constructively to help them firstly understand the investment needs of modern manufacturers and secondly on how to modernise the tax system to match those needs.
And they have listened, acknowledging that many modern machines are only really productive for a few years before technology moves on. They have also committed to working with EEF to find ways of improving the tax system - by adopting our recommendations on the Short Life Asset regime - to reflect the real costs and shorter lives of modern machines.
EEF's proposals essentially say that modern machines have become like computers (in fact, most machines are powered by sophisticated computer systems): advances in technology makes them obsolete long before the machine stops working. So we've recommended that the tax system treats machines like it does computers, allowing manufacturers to write of the full cost of their invesments within eight years.
And because rebalancing our economy must remain a priority, EEF will continue to work with which ever party/parties that form the next government to ensure that the UK has a tax system that enables manufacturing and a balanced economy to flourish.
For background, here's each of the three parties views on investment and capital allowances:
Political parties' tax proposals
Cut the headline rate of corporation tax to 25p and the small companies’ rate to 20p, funded by scrapping the Annual Ivestment Allowance and reducing the level of capital allowances to 12.5%.
Further reforms include simplify how foreign profits are taxed and provide a lower tax rate on intellectual property. But given their belief of the importance of manufacturing to future gorwth, the party has committed to working with EEF to create a tax regime which better reflects the real costs of modern machinery.
||Maintain the £100,000 cap on the Annual Investment Allowance
||Align the rate for capital gains tax with the rates for income tax.