The Sensitivity of Businesses to Initial and Investment Allowances

Following the introduction of a target for the annual average rate of growth in output in the U.K. economy put forward by the National Economic Development Council, renewed emphasis was placed by the Chancellor of the Exchequer in the 1963 budget on those financial incentives which might be expected to help businesses accelerate their rate of investment in new plant and equipment. This article discusses the effectiveness of two such incentives-initial allowances and investment allowances. The discussion is based on the results of a postal sample survey carried out by the first of the authors during National Productivity Year into factors affecting productivity in businesses in the south-west of England. Complete details of the productivity survey and the procedures employed will appear elsewhere, but a brief resume will be given later in this article to enable readers to appreciate the significance of the results obtained within this section of the inquiry. 2. Initial allowances were first introduced in 1945, and have been in force at varying rates and with varying coverage ever since. Under the initial allowance, a firm may claim a specified extra proportion of the cost of certain classes of asset in the first year, but this supplementary allowance (over and above the normal annual or wear and tear allowance) is then deducted from the written down value for tax purposes, and so reduces the sum on which subsequent depreciation allowances are calculated. The eventual sum of the initial allowance and the ordinary depreciation allowances may not exceed the original cost of the asset. The investment allowance was first introduced in 1954, and has also been revised from time to time in scope and amount. Like the initial allowance, it permits a firm to claim a specified extra proportion of the cost of certain classes of asset in the first year, but unlike the initial allowance, this supplementary allowance is not taken into account in the calculation of subsequent depreciation allowances. It is therefore possible with the investment allowance eventually to write off for tax purposes a sum greater than the original cost of the asset.2 3. Initial allowances are usually characterized in their effects as an interest-free loan , and investment allowances as a concealed subsidy .