Spring Budget 2023

With the current temporary “130% super-deduction” due to expire on 31 March 2023, measures were announced to encourage continued business investment from 1 April 2023, when the main corporation tax rate will increase from 19% to 25%.

Full expensing and 50% first year allowance

“Full expensing” will be introduced from 1 April 2023 until 31 March 2026, allowing companies liable for corporation tax to benefit from a 100% first-year allowance (FYA) for capital expenditure on qualifying plant and machinery. This deduction will allow companies to potentially reduce tax payable by 25p for every £1 invested in eligible plant and machinery.

The 100% FYA will be available for expenditure on new and unused plant and machinery that ordinarily qualifies for the 18% main rate of writing down allowances. A temporary FYA of 50% will also be available for expenditure on new and unused special rate plant and machinery, including integral features in a building, and long-life assets that normally qualify for 6% writing down allowances. This represents no change from the former temporary FYA that has been available since 1 April 2021 for expenditure on these assets.

The measures announced will only apply to qualifying expenditure on “new” and not “second hand” or “used”, plant and machinery from 1 April 2023, although it is not clear whether the FYAs will only apply for expenditure incurred under contracts entered into after 15 March 2023. Such provisions existed for both the super-deduction and SR allowance, where expenditure was only qualifying if incurred under a contract entered into on or after 3 March 2021.

As the 100% and 50% deductions are FYAs, the general exclusions for FYAs will apply, and therefore expenditure on cars or plant or machinery acquired for leasing will be excluded. However, the temporary allowances will be available for plant and machinery leased under an excluded lease of background plant and machinery, meaning landlords and property investment companies will be eligible. Plant and machinery must also be owned in the period FYAs are claimed; certain deposit payments without legal title passing in the same period may not be eligible.

Any expenditure that has been subject to full expensing or the 50% FYAs will be subject to an immediate balancing charge on disposal of the plant and machinery. This will be equal to 100% of the disposal value for full expensing and 50% of the disposal value in respect of the 50% FYAs.

As expected with any enhanced allowance or relief, anti-avoidance provisions will apply to prevent certain arrangements that may be contrived, are otherwise abnormal or do not have a genuine commercial purpose to obtain the allowances, including connected party transactions.

Annual Investment Allowance

As previously announced, legislation will be introduced to permanently increase the rate of the Annual Investment Allowance (AIA) from £200,000 to £1 million per annum for expenditure on qualifying plant and machinery. Although the AIA had been temporarily increased to £1 million since 1 January 2019, the AIA was due to return to £200,000 from April 2023 to align with the end of the super-deduction. Fortunately, the complex transitional rules that apply to chargeable periods that straddle 1 April 2023 will no longer be required.

Companies will need to consider the allocation of the AIA in conjunction with any expenditure not eligible for 100% full expensing and/or the 50% FYA.

Conclusion

The new measures will be welcomed by companies and businesses planning to invest. With the full expensing announcements being introduced for at least 3 years, and potentially permanently from 2026, and the AIA of £1 million being made permanent, a period of certainty has been introduced for companies making investment decisions. However, as with previous announcements, it will be necessary to consider the legislation in full to see the detail behind the changes announced, and any specific exclusions from the rules.

Continuing the Government’s Levelling Up agenda, the Chancellor committed to the delivery of 12 Investment Zones across the UK, each with an investment package worth up to £80 million.

The creation of these “knowledge-intensive growth clusters” will be centred around universities and research institutes, with an expectation of creating increased investment and growth in the sectors of green industries, digital technologies, life sciences, creative industries and advanced manufacturing.

Originally announced by Kwasi Kwarteng in the 2022 Mini Budget, the government has since refocused the programme, reducing the number of zones from 38 to 12. The revised plans allow businesses established in approved Investment Zones to benefit from the following reliefs for a five year period:

• Full relief from Stamp Duty Land Tax for commercial land and buildings
• Full Business Rates relief
• 100% first year enhanced capital allowances for plant and machinery
• Accelerated enhanced Structures and Buildings Allowances at a rate of 10% per annum
• Secondary Class 1 NICs relief for eligible employers on the earnings of eligible employees (who work in the tax site for at least 60% of their time) up to £25,000 per annum, for up to 36 months per employee.

Grant funding will also be available to Investment Zones to alleviate barriers to productivity in the local area (for example, by supporting skills and apprenticeships, providing targeted business support and improving local infrastructure).

The government is currently in discussions with local authorities on Investment Zone proposals in Liverpool, Greater Manchester, East Midlands, West Midlands, North East, Teesside, South Yorkshire and West Yorkshire. Four additional Investment Zones are also earmarked across Scotland, Wales and Northern Ireland, with the help of the devolved administrations.

Reform of R&D tax reliefs has been going on for several years and is becoming an iterative process with new changes taking effect from April 2023 and previously announced changes delayed until 2024. This is not helpful for businesses trying to keep up with all the changes, but it is really important that they do so.

Overseas costs

Draft legislation to prevent companies from claiming R&D relief in the UK for project work undertaken overseas was released last year and was due to take effect for accounting periods beginning on or after 1 April 2023.

This change has now been delayed until April 2024 when the government plans to combine both the current R&D tax relief schemes into a single comprehensive regime. The delay is good news but may only be a deferral of the inevitable. In addition, many businesses will have already started planning for the change, so the reversal coming so late in the day, may bring little or no benefit.

SME relief – reprieve for some loss-making businesses

Changes to the rates of R&D relief that were announced at the Autumn Statement 2022 are due to take effect from April 2023. The changes meant that loss-making companies were expecting to see their effective rate of subsidy through the repayable R&D credit fall from 33.4% of costs to just 18.6%.

The Chancellor has now announced that where such loss-making businesses have qualifying R&D expenditure of more than 40% of their total annual costs, they will be able to claim a repayable credit of 27% of their costs. Therefore, while these R&D-intensive businesses will still lose some funding support from April 2023 onwards, the impact will be less than previously feared.

There is no similar relief for R&D-intensive businesses who have already begun to make profits.

New claims process brought forward

It was announced in the Autumn Statement 2022 that HMRC would require companies submitting R&D claims for accounting periods starting after 1 April 2023 to supply an ‘Additional Information’ form with the claim. This form require significantly more information than is currently submitted with claims. You can find out more of the detail here.

This change has now been brought forward and will apply to all claims submitted under the SME or RDEC schemes from 1 August 2023. HMRC believes that the new process will help reduce error and fraud in R&D claims, so it is perhaps no surprise that this change has been accelerated.

Funding for future technologies

The government has published its Quantum Strategy backed by plans to invest £2.5bn over 10 years to help fund the development of quantum technologies in the UK. Alongside this, it will create an Annual “Manchester prize” of £1m for UK individuals or businesses making the most important advances in AI. Finally, the government will invest £100 million in the Innovation Accelerators programme for transformative R&D projects.

Multinational top-up tax and domestic top-up tax

Much as we had predicted, the Government confirmed the introduction of the new multinational top-up tax to be levied on UK parent members within a multinational enterprise group. The introduction of the new multinational top-up tax will implement the UK Pillar Two legislation issued in draft on 20 July 2022. You can find our analysis of the draft rules here.

The draft legislation did not include the introduction of a domestic top-up tax. The Government has now announced that the domestic top-up tax will be levied on UK members within a domestic or multinational enterprise group to ensure that any top-up tax due on UK profits is collected in the UK.

The multinational top-up tax will be charged where a UK parent member has an interest in entities located in a non-UK jurisdiction, and the group’s profits arising in that jurisdiction are taxed at below the minimum rate of 15%. The amount brought into charge will be that required to achieve a 15% minimum rate. No additional tax will arise in respect of jurisdictions where the group’s profits are taxed at 15% or more.

The domestic top-up tax will be charged when the group’s profits arising in the UK are taxed at below the minimum rate of 15%.

These measures will have effect in respect of in-scope groups’ accounting periods beginning on or after 31 December 2023. The measures have been adopted in order to comply with the global minimum corporate tax rate of 15% proposed by the OECD and agreed to by the G20 and 136 Members of the OECD Inclusive Framework.

Cultural tax reliefs

The temporary higher rates of theatre, orchestra, and museums and galleries tax reliefs will be extended for two further years from April 2023, and will then be reduced over the following two years, as follows:

From 1 April 2024, the definition of qualifying expenditure for the cultural tax reliefs will be changed from ‘expenditure that is incurred on goods and services provided from within the UK or EEA’, to ‘expenditure on goods and services that are used or consumed in the UK.’ The eligibility requirement for the reliefs will be changed to require a minimum 10% of expenditure to be on ‘goods and services used or consumed in the UK.’ This will replace the existing requirement for at least 25% of core costs to be incurred on goods and services from within the UK or EEA.

Creative sector tax reliefs

Film, TV and video games tax reliefs to be reformed to refundable expenditure credits

For accounting periods ending on or after 1 January 2024, these reliefs will be reformed to refundable expenditure credits, based on the RDEC scheme. The expenditure credits will be calculated directly from qualifying expenditure, instead of being an adjustment to the company’s taxable profit as under the existing regime.

There will be two expenditure credits:

• Audio-Visual Expenditure Credit - to cover the four existing film and TV tax reliefs.
• Video Games Expenditure Credit.

Video games, film and high-end TV will have a rate of 34%. Animation and children’s TV will have a rate of 39%.

Productions that have claimed relief under the current system will be able to opt into the new regime.

The current tax reliefs will close to new productions from 1 April 2025. Films and TV programmes that have not concluded principal photography, and video games that have not concluded development by 1 April 2025 may continue to claim relief under the current regime until 31 March 2027.

Administrative changes

The Finance Bill 2023-2024 will also contain several administrative changes to all eight of the creative industry tax reliefs, to address unintended consequences and improve compliance. This will include an anti-abuse measure on payments between connected parties. Draft legislation will be published in summer 2023 for consultation, and the changes will take effect from January 2024.

If you think these changes will affect your business, you can speak to one of our sector experts about how we can help – get in touch today.

Certain refinements are to be made to the Qualifying Asset Holding Company (‘QAHC’) regime that was introduced from 1 April 2022 to better align the conditions with the intended scope of the regime. Under the current rules, a QAHC could fail the investment strategy condition if it were to acquire interests in listed shares outside of certain prescribed circumstances, even though this may have occurred as part of normal commercial dealings.

The proposed changes will allow a QAHC to elect to treat listed securities as unlisted such that it continues to meet this condition, but it will be taxable on any dividend income received from those securities. The definition of qualifying entities will be amended to include entities that would be collective investment schemes if they were not bodies corporate and specifically exclude securitisation vehicles. The anti-fragmentation rule will be extended to exclude arrangements involving multiple QAHCs where the combined interests held by non-qualifying investors exceeds 30%. Amendments will be made to the chargeable gains exemption such that it works as intended where a QAHC invests in a derivative contract with an underlying subject matter of shares.

As part of a separate but related measure, the general diversity of ownership (‘GDO’) condition, relevant for assessing whether certain investment funds are qualifying investors for the purposes of the QAHC regime, will be extended to consider multi-vehicle arrangements holistically rather than on an entity-by-entity basis. This should mean that asset holding companies held by parallel fund structures that collectively should meet the GDO condition, but would not on an entity-by-entity basis, will be able to benefit from the regime.

A number of reforms to the REIT rules announced in December 2022 have been confirmed and expanded on.

From 1 April 2023, a REIT can be formed holding a single commercial property, where that property is worth at least £20m. This is expected to remove the barrier that currently arises from the requirement to hold a minimum of three properties in relevant cases.

Where a REIT makes a disposal of a property within three years of having undertaken ‘significant development’ of that property, the gain arising on disposal is treated as part of the taxable residual business of the REIT. ‘Significant’, for this purpose, is currently evaluated by comparing whether the cost of development exceeds 30% of the value of the property on acquisition or entry to the REIT regime. From 1 April 2023, this evaluation will be changed so that the definition of ‘significant development’ better reflects increases in property values.

From 1 April 2023, regulations will be changed. REITs will be allowed to pay property income dividends to a partnership that is a shareholder in the REIT, by paying partly gross and partly net of a withholding of income tax, where those in the partnership would have been entitled to receive the dividend gross if they had held the shares directly. This will give rise to a significant administrative simplification for REITs that have been established by institutional investors.

REITS established by institutional investors, such as collective investment schemes, can in some circumstances be exempt from the requirement to be listed on a recognised stock exchange, if the collective investment scheme has genuine diversity of ownership. Diversity of ownership is currently evaluated only by reference to the fund vehicle itself. When the Spring Finance Bill passes, this evaluation will be widened to include cases where the fund vehicle is part of multi vehicle arrangements, where the arrangements as a whole meet the requirement but the fund vehicle in isolation does not.

HMRC is owed around £48billion in unpaid taxes. Last year, HMRC extended its existing Self-Serve Time to Pay (SSTTP) service to employers with PAYE debt. The Budget included further measures to enable HMRC to better manage outstanding tax debt. This includes investing a further £47.2 million over five years to enable it to:

• Better distinguish between taxpayers who can afford to settle their tax debts but choose not to and those who are temporarily unable to pay. This would enable HMRC to better tailor support for taxpayers with tax debts
• Enhance the existing ‘Time To Pay’ tool to allow more taxpayers to arrange payment plans online themselves
• Temporarily boost HMRC’s debt collection capacity

Anyone who owes HMRC money should proactively contact HMRC. Taxpayers can use the SSTTP or contact HMRC by phone to arrange to settle their debt by instalments. It is important to avoid being contacted by the debt collection teams or third-party debt collection agencies.

Remember also that late payment interest on unpaid taxes accrues daily with the current interest rate at 6.5%. If you need professional help to agree a Time To Pay Agreement with HMRC, please see our guide and contact details for our specialists here: Tax debts and time to pay.

For higher earners, the ability to contribute into pensions has, up to now, been curtailed by two restrictions. The Annual Allowance (AA) restricts the amount a person can pay into a pension during a particular year. The Life Time Allowance (LTA) seeks to cap the size of the fund that accrues during your lifetime.

Whereas private sector workers caught within the restrictions can control their pension contributions, public sector workers usually cannot, as their employers will continue to contribute based on their earnings. In practice, the only way high earning public sector workers (such as senior NHS clinicians) are able limit their exposure to AA and LTA charges is by restricting their earnings by choosing to work less, or retire.

The Chancellor has announced the abolition of the LTA and the raising of the limits for the AA to “help remove incentives for doctors to work reduced hours or retire early due to pension tax concerns.” The measures extend beyond just the healthcare sector however, meaning everyone can benefit from the changes.

Annual allowance change

Where pension contributions for a year exceed the AA, the excess is subject to charge at the persons marginal rate of income tax. The available AA is also tapered by £1 for each £2 adjusted income exceeds a defined limit.

From 6 April 2023, the AA will increase from £40,000 to £60,000. The adjusted income limit will increase from £240,000 to £260,000 and, where tapering applies, the minimum tapered AA will be £10,000, up from £4,000.

Where a public sector worker is a member of both a closed and an open pension scheme, they will be linked and the combined pension income will be calculated as if it were a single scheme. This enables the offset of negative real growth in legacy public sector schemes when calculating the AA.

Lifetime Allowance changes

On a ‘benefit crystallising event’ (e.g., first accessing a pension or 75^th birthday), pension funds are tested and, if their value exceeds the LTA (currently £1.07m), the excess is subject to a tax charge. When the excess is taken from the pension as a lump sum, the tax is charged at a rate of 55%. Where the excess remains in the pension fund it will be taxed at 25% (recognising that it will subsequently be subject to PAYE on draw down).

From 6 April 2023 the LTA charge will be removed – it will be formally abolished in a later Finance Act. The LTA limit will, however, continue to exist for the purpose of capping the 25% tax-free lump sum available when first accessing a pension. This means that for most people the maximum tax-free lump sum they could accrue will be £268,275. However, where a pension protection is held, the maximum lump sum is 25% of the protected amount.

We would expect the new rules may lead to changes in widely used pension withdrawal strategies and we note that there has been no change to the treatment of Pensions for inheritance tax purposes.

Money purchase annual allowances (MPAA)

When a person first accesses a pension of any kind to draw income, their available annual allowance for all subsequent years, for the purpose of defined contribution schemes, is automatically tapered to the MPAA, regardless of their income level. The MPAA will be increased from £4,000 to £10,000.

Defined contributions scheme permitted investments

Following some high-profile pension scheme failures, strict rules were introduced restricting the types of investments pension schemes are permitted to hold.

However, the government sees pension schemes as a key source of investment for the innovation companies that it is seeking to support. Therefore, the government will spur the creation of new investment vehicles specifically tailored for defined contribution schemes to offer to their members as an investment option.

Separation and divorce

Transfers of assets between married couples/civil partners are treated as taking place on a “no gain/no loss” basis, meaning that no tax will be payable, but what happens in the case of a separation?

Under the current rules, the no gain/no loss provisions only apply up to the end of the tax year of separation, after which transfers are treated as taking place at market value. This can often give separating couples a very limited time frame to arrange for the division of their assets, or face significant tax liabilities.

It was confirmed in the Budget that for disposals on or after 6 April 2023, the no gain/no loss provisions will be extended until the third anniversary of the date on which the separating couple ceased living together. It was also announced that the provisions will cover assets transferred between the separating couple as part of a formal divorce agreement, for an unlimited period.

In addition, an individual who transfers the former marital home to their ex-partner and retains an entitlement to part of the proceeds on a later sale, will be able to apply the same tax treatment to the proceeds that would have applied at the date of the transfer. They will also have the option to claim private residence relief. The combination of these two measures potentially lessens the overall tax burden on the eventual sale of the marital home.

Unconditional contracts

Where an asset is disposed of under an unconditional contract, the date of disposal for Capital Gains Tax purposes is the date on which the unconditional contract is entered into. In many cases the asset will be transferred shortly thereafter, however, in certain circumstances there can be a gap of several months or even several years between the contract being agreed and the asset being transferred. 

Under the current rules (because they operate by reference to the tax year of the contract) this can lead to scenarios where the taxpayer is not required to report, and HMRC is unable to assess, the tax due on such disposals, because they fall outside of the prescribed four-year time limit for doing so. It can also put taxpayers in a situation where they are outside of the four-year time limit for making a claim for an allowable loss.

To counter these situations, legislation will be put in place to change the time limits where the date of transfer of the asset occurs more than six months after the end of the tax year in which the unconditional contract is entered into (for companies, one year after the end of the accounting period). Under the new rules, the time limits will operate by reference to the tax year (accounting period for companies) when the asset is transferred, rather than the tax year (accounting period) of the contract. The changes will take effect for unconditional contracts entered into from 6 April 2023 (1 April 2023 for companies).

Land held by Limited Liability and Scottish Partnerships – roll over and private residence relief

Under rules currently in place, partners and members of partnerships are, where certain conditions are met, able to claim roll over and private residence relief for certain exchanges of joint interests in land. The overall result being that the gain accruing on the transfer would be rolled over and realised on a subsequent disposal or, in the case of private residence relief, the gain would be reduced.

For claims made on or after 6 April 2023, legislation will be introduced to extend the reliefs so they equally apply for qualifying transfers of interests in land by Limited Liability Partnerships (LLPs) and Scottish Partnerships.

HMRC is reviewing the whole tax administration system – legislation and processes - via its 10-year tax administration framework review. It has now published a discussion document exploring how it can simplify and modernise Income Tax services. The discussion document invites views on a series of proposals to make administrative processes more efficient, as part of an overall drive towards ‘digital by default’. The proposals include:

• Introducing a ‘single customer account’ through which taxpayers will interact with all their tax information in one place, via an app or online. Taxpayers would be able to change their details as well as manage their tax code.
• Reducing paper communications by going digital. SA100 tax returns, notices to file, statements of account, payment reminders, tax calculations and coding notices would all become digital. However, HMRC would continue to support digitally excluded taxpayers.
• Reviewing the circumstances in which taxpayers are required to file income tax Self-Assessment returns.

HMRC wants to reduce the cost of running the tax system and make it more efficient. The accounting and tax profession have already called for investment to improve HMRC response times and service levels. We want to see any changes thoroughly tested through piloting as a way of ensuring that changes actually deliver improvements for taxpayers and tax agents in their dealings with HMRC.

The government is introducing a new elective accruals basis of taxation for carried interest intended to assist individuals who pay tax in more than one jurisdiction. This will allow UK resident investment managers to make a voluntary and irrevocable election for their carried interest to be taxed at an earlier time than under the current rules. 

This acceleration in their UK tax liabilities is intended to align their timing with the position in other jurisdictions where they may obtain double taxation relief. This is a welcome measure which should particularly assist UK taxpayers who are US citizens, who are generally liable to taxation in the US on an accruals basis for their carried interest. The new legislation will apply from 6 April 2022 – so an election can be made for 2022/23. 

VAT

Medical services carried out by staff ‘directly supervised’ by registered pharmacists will be exempt from VAT from 1 May 2023.

Prescriptions for medicines supplied through Patient Group Directions will be zero-rated from Autumn 2023

The DIY housebuilders scheme is to be digitised and the claim deadline will be extended from three to six months.

The government has issued a call for evidence on options to reform the VAT relief for the installation of energy saving materials. It will consider the inclusion of additional technologies, such as battery storage, and the possible extension of the relief to include buildings used solely for a relevant charitable purpose.

Customs Duty

HMRC has announced that it will introduce Advance Valuation Rulings (AVRs) to traders importing goods into the UK. An AVR will be a legally binding ruling on both parties and can be sought on a voluntary basis by an importing business. An AVR will be valid for specific goods and an agreed scenario for a three-year period.

Businesses use a range of complex valuation methodologies from the deductive method based on sale price, computed value based on production cost to the fallback method; ‘other reasonable method’ when all other methods can’t be used. The opportunity to get an AVR will be a welcome development for businesses and something we have been asking for on behalf of traders for a long time.

The AVR will give a trader importing goods absolute certainty that their valuation method is compliant and signed off by HMRC. We expect the use of AVRs to become standard practice for many businesses.

The government will also be consulting on a number of other Customs Duty simplifications during 2023.

Other duty changes

The rates of road fuel duty are to be frozen until April 2024. The rate of duty on draught beer in pubs will be 11p lower than alcohol sold in supermarkets from 1 August 2023.

From 1 April 2023, there will be a new domestic band for Air Passenger Duty for flights within the UK and a new ultra-long-haul band covering destinations with capitals located more than 5,500 miles from London.

Plastic Packaging Tax (PPT)

The rate of PPT will increase from 1 April 2023 from £200 per tonne to £210.82 per tonne in line with CPI. The government will also update the penalty regime so that businesses that are principally liable and businesses that are held secondarily liable, or joint and severally liable, incur the same penalties.

Enterprise Management Incentives (EMI) share options are tax advantaged share options that are available to smaller companies that meet specific criteria to be able to grant these share options to their employees.

The government has announced changes to the EMI compliance requirements, relating to the way in which EMI plan documents must be drafted, and the period for notifying the option grants to HMRC.

In summary, the changes that will apply from 6 April 2023 remove the requirement for the company to set out within the EMI option agreement the details of any restrictions on the shares to be acquired under the option. They also remove the requirement for the company to declare that an employee has signed a working time declaration when they are issued an EMI option. It does not remove the working time requirement itself.

From 6 April 2024, the government will also extend the deadline for notifying an EMI option from 92 days following grant to the 6 July following the end of the tax year (the usual date for annual share scheme reporting).

These changes should be well received by companies operating EMI schemes: these administrative requirements add little value but have become “pitfalls” which have caused many EMI options to fail to qualify for the beneficial tax treatment that they were intended to deliver.