Out of the Zone: EU assisted Enterprise Zones

Posted on 7 Mar 2012

EU assisted Enterprise Zones offer lots of benefits, but lack of clarity on the delivery mechanisms and whether or not 100% capital allowances will qualify for state aid means there are few signs of business investment yet. Will Stirling asks if Enterprise Zones can work for manufacturers.

In the Autumn Statement 2011, HM Treasury said that Enterprise Zones in six assisted areas will qualify for enhanced capital allowances (ECAs). In these areas (see below) 100% allowances will be available for plant and machinery investment incurred between April 2012 and March 2017.

But are the ECAs encouraging investment? Not all of the six qualifying Enterprise Zones (EZs) have had their ECAs confirmed by the Treasury. But some, like the North Eastern EZ, with two sites, have, and are now at a point where business investment is moving. “We’ve had many enquiries to both expand businesses and relocate within the EZ, from a spectrum that includes companies in advanced manufacturing,” says Paul Woolaston, who sits on the NELEP board. “We can give up to £100m per project on capital allowances.”

But there is a sense of frustration among the administrators of other Enterprise Zones. Some are waiting for approval of both ECAs and other, basic benefits of EZs like business rate relief and simpler planning rules. “The benefits are well known on paper, but we don’t have approval on all benefits nor the mechanisms for delivering them,” says Richard Lowther at Hull City Council, which is operating the two EZs in the Humber region. The benefits, due to kick-in on April 1, will not be ratified by Parliament until June leaving risk averse companies unwilling to tie business plans to EZ benefits.

The holdup in Parliament is partly due to the definition of state aid in EZs.

Companies are not normally eligible for both business rate relief and ECAs.HM Treasury says it is unaffordable, but also Brussels might take a dim view of businesses that getting both as receiving illegal state aid. However, there may be more flexibility on the definition of state aid within EU-assisted areas, where ECAs apply. “EU assisted areas are allowed to offer more state support as they are effectively deemed to be suffering from market failure,” says Mark Ridgway, managing director of Group Rhodes (p54) who sits on the Leeds City Region LEP board. “Additional support for companies in these areas levels the playing field and does not interfere with competition, so goes the theory.”

Status of Enhanced Capital Allowances and other benefits in ECA-eligible Enterprise Zones
Status of Enhanced Capital Allowances and other benefits in ECA-eligible Enterprise Zones

Some consider that the two types of relief in these assisted EZs – business rate relief and ECAs – are mutually exclusive. The former, for sums up to £225,000, are suitable for SMEs and the latter targets bigger companies and investments. ECAs therefore need a large, anchor investment, which is why allowances up to £100m are being offered per project in the NELEP.

But if the large scale investment – for example, the regeneration of Queen Elizabeth Docks in Hull – needs a further government financial incentive to get going, this may affect the status of ECAs as state aid. “Will ECAs be considered in that total calculation of state aid for these Zones, or be exempt?” asks Lowther. “Until these rules are explained, no-one will make any commitments.”

See The Last Word (p100) for more on HMT’s Enterprise Zone approach to capital allowances.