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UK Budget 2021 to incentivise 'smarter, greener' investment

Out-Law News | 04 Mar 2021 | 10:27 am | 3 min. read

Spending and policy announcements made as part of the UK budget will incentivise investment, particularly in projects that contribute to decarbonisation, according to experts at Pinsent Masons, the law firm behind Out-Law.

Chancellor Rishi Sunak used his budget speech to confirm more details of and a Leeds headquarters for the UK's planned national infrastructure bank. He also confirmed the locations of eight English 'freeports' following a recent competitive bidding process. These special economic zones will benefit from various tax reliefs, enhanced allowances and simplified customs and planning rules.

Companies will also be able to benefit from a two-year temporary 'super-deduction' on investment in new equipment from April 2021, allowing them to reduce their taxable profits by 130% of the cost of that equipment. The deduction will take effect ahead of a planned increase to the headline rate of UK corporation tax in 2023, from 19% to 25%.

The policy could be worth £25 billion over the two years that it is in place, and will offer an opportunity for construction companies to invest in "smarter, greener and more productive technology", according to infrastructure law expert Jon Hart of Pinsent Masons.

"The catch here would appear that the scheme operates as an effective subsidy, which is linked to reducing corporate tax bills," he said. "Given the levels of activity - and therefore levels of tax - for many companies coming out of the pandemic, this may be seen as placing limits on the levels of potential investment that may be available."

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Michael Watson

Partner, Head of Climate and Sustainability Advisory

The creation of the UK Infrastructure Bank signals an important step change in the UK's 'levelling up' agenda and heralds a new, exciting chapter for the infrastructure sector

The government also intends to establish a 'task force' on modern methods of construction (MMC), headquartered in Wolverhampton, to fast track the adoption of MMC for housing, according to the budget documents. Other spending commitments include funding for new port infrastructure to support the next generation of offshore wind in Teeside and Humberside, and new funding to support energy transition in the north east of Scotland.

The UK Infrastructure Bank will begin operating in interim form later in spring 2021, with an initial capitalisation of £12bn and the ability to support up to £40bn of infrastructure investment, according to a policy document published alongside the budget. It will provide financing support in the form of loans, hybrid products, equity and guarantees to both private sector and local authority infrastructure projects across the UK, with a focus on the government's objectives on climate change and regional economic growth.

Project finance expert Michael Watson of Pinsent Masons said that the bank would act as "both investor, encouraging emerging technologies to accelerate net zero, and finance provider, in part perhaps to replace the role of the European Investment Bank by looking to 'crowd in' commercial debt".

"Whilst this is a tall order it signals an important step change in the UK's 'levelling up' agenda and heralds a new, exciting chapter for the infrastructure sector - but the length of time it will take to establish and develop should not be underestimated," he said. "There may be questions asked over the level of initial capitalisation and the role that the green retail savings bond, also announced, may play, and how and where this capital is going to be deployed."

"There will undoubtedly be a flood of enquiries, but it is highly likely that only projects and financings that contribute to decarbonisation in a meaningful way will get through the door. Most importantly, this will include projects that accelerate the transition of 'brown' industries and projects to greener ones," he said.

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Robbie Owen

Partner, Parliamentary Agent

The hard work now begins for the successful bidders to work up the detail in establishing their freeports, not least governance and operational arrangements between a wide variety of different bid partners

The chancellor announced that the first English freeports will be located at East Midlands Airport; Felixstowe and Harwich; Humber; the Liverpool City Region; Plymouth; Solent; Thames; and Teeside. Two further freeports are planned for England, while the government intends to work with the devolved administrations on their own versions of the freeport model.

Infrastructure planning law expert Robbie Owen said that freeports "will be a game-changer for the government's levelling up agenda".

"Just under half of the bids submitted by the 5 February deadline were successful, the winners being major commercial ports around the clock face of England. However, the hard work now begins for the successful bidders to work up the detail in establishing their freeports by late 2021 or early 2022, not least governance and operational arrangements between a wide variety of different bid partners," he said.

"The government, too, will now have to work intensively to agree business cases, funding arrangements, planning reforms and the detail of the legislation required for the freeports to function. At the same time they will need to work constructively with the Scottish, Northern Irish and Welsh administrations to enable their own versions of the freeport model to come forward," he said.

The chancellor also announced two policies in support of home buyers: an extension to the stamp duty land tax 'holiday' on properties of up to £500,000 in value in England and Northern Ireland, until the end of June, followed by a £250,000 threshold until September; and a new UK-wide mortgage guarantee scheme, allowing for 5% deposit mortgages from a wider range of lenders on properties of up to £600,000 in value.

Housing expert Iain Gilbey said that the announcements would be welcomed by housebuilders.

"Much of the government's economic recovery plan is pinned on economic stimulus that will support and encourage the housing market, with the multiplier effects that benefit the construction industry and wider supply chain," he said.