Liz Truss’s ‘investment zones’ hit by efforts to reduce tax breaks

The UK government is drawing up plans to cut the tax breaks on offer as part of Liz Truss’s planned “investment zones” in an effort to limit the policy’s multibillion pound cost, according to Whitehall insiders.

The creation of scores of new low-tax, low-regulation business areas was one of the key “supply-side” economic reforms that the prime minister announced last month.

While new chancellor Jeremy Hunt on Monday scrapped many of the measures in the “mini” Budget to help calm financial markets, he said supply-side reforms, including the new investment zones, would be kept.

Officials have proposed cutting tax benefits in chosen areas in a push to reduce their cost, prompting consternation from regional leaders, including Andy Street, Conservative mayor of the West Midlands.

Local authorities have been invited to apply to host investment zones, which would offer an array of fiscal and planning advantages.

But one Whitehall official said there was alarm inside the Treasury about the project amounting to an “open-ended cheque book” because there was no cap on the number of investment zones.

Treasury officials have warned the areas risk creating a tax liability of “up to £12bn” a year at a time when the government is already struggling to fill an estimated £40bn fiscal black hole.

The finance ministry’s main concern is that the zones would offer tax breaks that would in effect subsidise economic activity that would have occurred anyway.

Truss overruled an attempt by former chancellor Kwasi Kwarteng to cap the number of zones at 40. Aides admit that discussions between Number 10 and the Treasury over what form the policy should take and how its cost could be constrained are ongoing.

This impasse partly explains why the Department for Levelling Up has delayed an announcement about the details of the scheme until the end of October.

One proposal is for the government to cut the amount of time councils hosting zones are able to benefit from the economic growth they provide.

Under the current plans, companies in designated areas will benefit from full business rates relief on newly occupied or expanded premises.

In turn, local authorities that host the zones would receive 100 per cent of the business rates growth — above an agreed baseline — for 25 years.

However, officials have proposed that the period could be cut to 10 years, limiting the amount of money councils receive. Aides have insisted that the idea had yet to be signed off by ministers.

Street urged the government not to U-turn on its promise to provide the business rates retention for a quarter of a century, saying: “If you have 25 years you can make game-changing investments.”

The government said the zones offering “time-limited tax incentives” would “drive growth by incentivising businesses to start, grow and innovate”.

“They will deliver investment, quality jobs, higher wages and housing that local communities want and need.”

Levelling-up secretary Simon Clarke insisted on Monday that the “transformational programme” would not be derailed by Hunt’s push to cut government spending.

But one senior Whitehall official with knowledge of internal discussions said the policy would probably end up dead “in any significant form” as the Treasury sought to limit its tax liability.

“It’s difficult to see how the [zones] can be justified at the moment,” the official said. “The expectation is it will be kept on life support, then quietly killed.”

Before Hunt became chancellor, ministers had sought to inject urgency into the scheme. Local authorities were given a deadline of last Friday to apply to host zones and told that successful applicants would have to meet a “high bar”.