Corporation tax on investment in plant and machinery: Two extreme cases

Richard H Mole

Omega, 1988, vol. 16, issue 5, 457-467

Abstract: Radical changes to the structure of UK corporate taxation, which were introduced in the 1984 Finance Act, became fully effective in April 1986. This paper considers the impact of the new taxation arrangements upon the appraisal of capital investment projects. The impact is measured by the percentage change in the project Net Present Value (NPV) which is due to taxation. Four numerical examples are given, and this is followed by mathematical modelling, for the case of investment of a single capital sum in 'plant and machinery' and uniform cash returns over a fixed duration. The paper takes the two extreme cases of 100% equity and 100% debt financing in order to indicate the potential effect of gearing on the impact of the new tax regulations on investment in plant and machinery. The analysis shows that the tax impact can range from over 100% of the pre-tax NPV to a negative quantity, representing a subsidy.

Date: 1988
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