Introduction
It is a truth universally acknowledged that housing supply in the UK desperately needs a boost. The question on policymakers’ minds is how to do this in a pragmatic and sustainable way. One potential solution? Full expensing in the housebuilding sector. Along with the Adam Smith Institute, PricedOut has produced a report on the potential impacts of this policy for brownfield development.
In his November 2023 Autumn Statement, the Chancellor the Exchequer made full expensing permanent. Full expensing allows companies to deduct 100% of their plant and machinery costs from their taxable profits in a single tax year, rather than over several years as in the past. By reducing upfront risk in capital expenditure, which is necessary for a company’s growth, this policy is expected to result in increased business investment and a corresponding downstream improvement in productivity and tax revenue.
In our report, we argue that this should be extended to brownfield housing development, resulting in three main benefits: the production of up to 450,000 brownfield houses over three years, accounting for nearly half of the total UK housing target; a corresponding growth in tax revenue for the Treasury; and an increase in the number of small and medium-sized enterprises (SME) in house building, which have been decimated in the past few decades.
The Proposal
Incentives to invest in house building have declined in recent years, with increases in corporate tax and the introduction of a property developer tax and building safety levy. These fees, coming on top of a difficult planning environment and highly inelastic housing supply, result in fewer and more expensive homes.
Despite being nominally privileged in national planning policy and significantly favoured by the public, brownfield development is often deprioritised by developers. It requires significantly greater up-front investment than greenfield, meaning it is inherently much riskier and thus much less likely to be delivered, especially in an environment where said investment can only be deducted from revenue over several tax years, rather than all at once. But allowing full expensing for capital expenditures, particularly the brownfield remediation necessary for creating sites that are viable for house building, would lower the risk to developers and thus result in more housing.
Benefits
Provide significant support to SMEs
Small and medium developers face much higher capital costs and finance each individual development on a site-by-site basis, rather than relying on financing across the company as a whole as larger developers do. This reality means that SMEs are far more vulnerable to individual project variance and the increased risk posed by brownfield developments; decreasing the upfront risk in such projects by allowing full expensing would provide indirect support to such developers.
Cost neutral
Full expensing will result in, at worst, a cost-neutral impact on the Treasury’s finances, as it only impacts the timing of taxation, rather than the amount deducted. In fact, it will likely increase tax revenue both directly (increasing the total number of homes built and thus taxable profits) and indirectly (an increase in economic development in an area), resulting in more money overall for the Treasury.
Improves viability
This policy will materially improve the business case for many brownfield schemes by decreasing the upfront cost of capital, thus increasing the potential return to capital and the corresponding likelihood of obtaining financing for a project. This is particularly likely to be true in sites where the house prices are likely to be lower or the area is particularly in need of regeneration and investment due to higher upfront remediation costs.
Supplies a clear investment signal
In recent years, the case for investing in housing development has declined as fees climb and planning permissions for new sites become increasingly difficult to obtain. Allowing full expensing for brownfield development will send a clear signal to investors that housing is a sector worth investing in – which is necessary for the boost in housing supply and corresponding increase in economic growth that the UK desperately needs.
Improves placemaking
Good placemaking requires a significant (and expensive) amount of upfront work to determine where key amenities such as parks, schools, playgrounds, roads, and so on should be located before any houses are ever built. Full expensing will reduce upfront costs to businesses, thus encouraging them to invest in the delivery of such amenities.
Appendices
The detailed report can be found here, including the link to the model and data used.
