The wish list

While a new system of capital allowances seems to be the infrastructure investor’s best shot at tax relief, there are other tax breaks that could help spur investment.

Capital allowances are not the only tool in the taxman’s toolbox that could help catalyse infrastructure investment. Below, we present a selection of other potential solutions.

Treat debt and equity like twins

According to the CBI, “at the moment, costs of raising debt finance are tax deductible, while the costs of raising equity are not, and this has a distorting effect, discouraging businesses from seeking equity finance even in cases where it is clearly the more appropriate form of finance”.

The CBI’s solution? “Make consistent the treatment of equity and debt finance.”

Berwin Leighton Paisner’s Tom Lyon agrees that the differential tax treatment has a distorting effect, but adds that that is a general feature of the company tax regime in the UK and most other countries. 

“Because of the tax advantage of debt funding – which is riskier for the borrower – companies have been forced to go the debt route to get tax advantages. But that is not something that can be addressed in the narrow context of encouraging infrastructure investment,” Lyon warns.

“There’s been a lot of legislation about the deductibility of interest on shareholder debt, especially since 2005, when the transfer pricing regime was overhauled,” Nicholas Gardner, tax partner at Ashurst, explains.

“Allowing tax deductions for the cost of equity finance would most likely be prohibitively expensive.  Conversely, taxpayers would be very disappointed if suddenly the tax deductibility of interest was denied to level the playing field and this would have wide ramifications,” he adds.

Reinstate a dividend tax credit

Former Chancellor Gordon Brown’s 1997 decision to scrap the dividend tax credit on UK pension funds has been described as one of the great tax grabs in recent memory. Up until then, pensions were able to get a tax credit of 20 percent on dividends received from UK companies.

The main reason reinstating the dividend tax credit looks like mission impossible is simply because it would cost the UK billions of pounds in lost revenue – again, not a happy prospect for a cash-starved government.

But what if the dividend tax credit were only partly reinstated, limited in time and extremely narrow in scope? That’s precisely what the CBI is urging the government to do, if it wants to get more pension investment into infrastructure.

“One way to do this could be to reinstate a time-limited dividend tax credit for pension funds, but targeted solely to direct investment in greenfield infrastructure projects,” the CBI suggested. “A targeted reinstatement of the dividend tax credit for a 1 percent allocation in greenfield infrastructure – with an expected average rate of return of 3 percent – of eligible pension fund assets (£1 trillion) would mean an estimated additional cost to the government of £300 million.”

The trickier question is: would a boost to returns on greenfield infrastructure be enough to convince pension funds to overcome their traditional reluctance to take construction risk?

Margaret Stephens, partner and global head of infrastructure tax at consultancy KPMG, believes it would at the very least help in one important way: “It could work as it would give pensions a good reason to invest in developing their infrastructure teams,” she explains.


“Pension fund investment in UK real estate has become more attractive thanks to these special purpose vehicles called Real Estate Investment Trusts (REIT),” Adam Renton, associate tax partner, at KPMG, points out.

A UK REIT is a public vehicle that manages commercial or residential property on behalf of its shareholders and is exempt from paying corporate tax.

“Attaining UK-REIT status removes the potential for ‘double taxation’ at both the corporate and the investor level and is intended to help align returns from property held within REIT structures with that held directly,” reads a definition from the London Stock Exchange website.

“The British Property Federation has offered to lend its expertise to help set up similar vehicles for infrastructure,” adds Stephens. But even if infrastructure could be ‘REIT-ed’, so to speak, this is, at best, a medium-term prospect.

“REITs took many years to lobby for. In the case of infrastructure, I foresee there could be some problems around the actual definition of what is infrastructure. These new vehicles would then also have to be marketed to investors. So you’re looking at a process that could take between three to five years to set up,” she concludes.