FULL BUDGET ANALYSIS
Chancellor Jeremy Hunt delivered his Spring Budget, accompanied by a full fiscal statement from the OBR. With the UK now predicted to narrowly avoid a recession in 2023, the Chancellor focused on delivering the government’s growth plans. A raft of measures were announced, including the extension of some business tax reliefs, ongoing funding for the levelling up agenda and targeted measures on childcare and pensions to encourage more people back into work.
More details are expected on the Electricity Generator Levy, among other measures, in the Spring Finance Bill at the end of the month.
We have broken down announcements from the Spring Budget into sections – you can find in depth analysis below, under the headings of Corporate Tax, Personal Tax, Indirect Tax, Employment Tax and sector commentary.
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” 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.
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.
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:
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.
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.
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.
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.
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.
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.
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:
|Up to 31 March 2025
|2026/27 and onwards
Theatre tax relief
|Orchestra tax relief
Museums and galleries tax relief
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.
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:
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.
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:
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.
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.
On a ‘benefit crystallising event’ (e.g., first accessing a pension or 75th 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.
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.
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.
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.
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).
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:
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.
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.
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.
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.
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.
The Chancellor, Jeremy Hunt has recognised that he must tackle economic activity and low productivity in order to grow the UK economy. He plans to do so through a four-pillar strategy based on Enterprise, Employment, Education and Everywhere.
There are currently 1 million vacancies and almost 7 million adults not in work. Employment is key to growth. Removing the barriers preventing people from working is essential to effectively meet current demand for labour and help businesses to grow.
It is widely recognised that the high, and increasing, cost of childcare is preventing parents from returning to work after the birth of a child. Care costs can represent nearly 30% of the average wage for a couple with two children which is nearly twice the OECD average.
To address the needs of the 435,000 parents of children aged under 3 years old, the government is expanding the provision of free childcare for working parents with children aged 9 months to 3 years old and earning less than £100,000. This ties in with a typical maternity leave period meaning fewer career breaks for parenthood. To allow the infrastructure in to be put in place, the expansion in free childcare will be phased as follows:
The government is also proposing to substantially increase the hourly funding rate paid to providers in order to address concerns that government funding is not sufficient to meet the costs of providing free childcare. It is also increasing the ‘carer to child’ ratio to 1:5. This is the ratio currently used in Scotland.
The government will also fund “wrap around care” so that primary school children can be cared for in a school environment from 8am to 6pm although this will not be fully in place until 2026.
Not only will these proposals give employers access to experienced, skilled labour, they will also be extremely popular with many parents who do not want to take a career break while raising their families. The measures, alongside shared parental leave, may also reduce the gender pay gap as they should reduce the disparity in the career paths between women and men.
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.
This Budget saw the Chancellor make a few welcome announcements that will benefit not-for-profit organisations claiming creative industries reliefs, including an extension of the sunset clause on Museums & Galleries Relief for a further two years. There are other changes that organisations should be aware of, including changes to the definition of Charity and Community Amateur Sports Club, and further funding for organisations working in mental health and suicide prevention.
Author: Carole Le Page, Partner
The life sciences sector was brought into the spotlight in the Chancellor’s Spring Budget, with several measures that will affect companies in the industry.
Early-stage SMEs may well be feeling some relief following the Chancellors’ R&D tax credit announcement for R&D intensive companies. The changes should mean that the current 14.5% payable credit for qualifying loss-making SMEs should effectively continue undisturbed, leading to a payment of 27p per £1 post 1 April 2023. This goes some way to addressing a key concern that could have discouraged some future investment in R&D in the UK, but we will need to wait until the summer for detailed guidance and legislation to enable businesses to be certain that they qualify.
In terms of wider funding, the consultation on the “LIFTS” initiative published today aims to source new institutional investment for the UK’s most innovative companies, so will be welcomed by the sector. A series of Investment Zones have also been identified, with life sciences businesses being one of the focus areas, and funding due to commence in FY24/25.
Smaller businesses in the sector often grant EMI options to their employees as a key part of their remuneration package, for exercise on a future sale or listing. These businesses will welcome the relaxing of certain administrative requirements that need to be met at option grant, including for unexercised options already granted.
If you think your business will be affected by the Budget measures, and want to discuss the implications with one of our Life Sciences experts, get in touch today.
Part of the Government’s levelling up agenda, the Chancellor announced a programme of ‘Investment Zones’ aimed at attracting private sector investment and driving regeneration. This includes 12 high-potential knowledge-intensive growth clusters across the UK including four across Scotland, Wales and Northern Ireland.
Special tax sites in or connected with Investment Zones will have access to tax incentives matching those provided to Freeports. These include enhanced rates of capital allowances, relief from Stamp Duty Land Tax, Business Rates and Employer National Insurance Contributions as well as access to flexible grant funding to support employment.
The Chancellor referred to the Investment Zones as 12 potential new “Canary Wharfs”. It is hoped that the tax incentives will encourage businesses to invest and hire new employees within the tax sites. This should stimulate successful regeneration projects that can ultimately be as successful as the Canary Wharf and Liverpool Docks projects that the Chancellor referenced in his speech.
A new Tonnage Tax election window for 18 months will open on 1 June 2023. Given the strict re-entry requirements that need to be met to qualify for Tonnage Tax, this presents a valuable opportunity for re-entry into the regime.
The new election window will be welcome for those companies that either missed a renewal election or the initial election into Tonnage Tax. It will also benefit those companies that sold all their qualifying vessels and left Tonnage Tax. These now have a new opportunity to re-join Tonnage Tax.
Tonnage Tax is also being opened to UK ship management companies for the first time. This will make the UK a more attractive location to operate and manage ships and will align with a number of other countries that already permit ship management within their own shipping tax regimes. The limit on capital allowances for lessors of ships is being increased to £200 million but further details of how tonnage tax companies can access this have yet to be published.
Read about further shipping updates in the latest Bottom Line newsletter.
The Spring Budget contained a number of measures relevant to real estate businesses and investors. The Chancellor has shown a willingness to listen to and act on industry feedback.
The most notable announcement is that there will be no change to the current sovereign immunity tax exemption which reflects industry feedback during the recent consultation. This is a welcome announcement strengthening the UK’s attractiveness to this important investor class even if it possible that this exemption may be revisited at a later date.
Real Estate investors are also likely to welcome the continued support of investment expenditure, in the form of full “expensing” of capital allowances through to 31 March 2026 and making permanent the Annual Investment Allowance at £1 million.
Other relevant announcements include:
The changes are designed to enhance the attractiveness of the Real Estate Investment Trust (REIT) regime. The measures are welcome but may fall short in making a truly substantial difference to the regime’s attractiveness or its ability to encourage further investment.
The changes to the Qualifying Asset Holding Companies (QAHC) regime are supposed to increase their availability to investment fund structures and, again, their attractiveness. Introduced in April 2022, QAHCs are a relatively recent development so it is perhaps too early to tell what the overall effect on UK real estate will be. The less extensive changes to the capital gains exemption election qualifying criteria are intended to make it easier for fund structures to qualify and highlight the Government’s continuing commitment to ensuring the success of the regime.
As the Government looks to replicate the success of Canary Wharf, it has turned to Investment Zones as the way forward. The proposed tax reliefs are very generous, including SDLT relief on property acquisitions within the zones. However, it remains to be seen whether such incentives generate “new” investment or simply redirect planned investment.
The proposed changes provide additional support for SMEs and is likely to be welcomed by businesses focusing on PropTech and other real estate focused technology solutions.
This is a surprisingly relevant budget for real estate businesses and investors. You can find our analysis of all the tax measures on our Budget hub.
Author: Simon Bird, Partner
Given the state of the country’s finances, it is not surprising that the Chancellor was unable to announce a swathe of support and incentive measure for the manufacturing sector. Nonetheless, creating a stable business environment that incentivises and boosts investment is the right approach and one we called for in our Manufacturing Manifesto in 2021.
On the investment front, the replacement of the super-deduction regime with “full expensing” of capital allowances for a period of 3 years should help larger manufacturers maintain similar levels of cash tax benefits. The earlier previous announcement of the Annual Investment Allowance being set at £1m permanently means almost all businesses will receive full tax relief for plant and machinery investment.
On the R&D front, changes for R&D intensive businesses are expected to benefit approximately 3,000 small and medium sized manufacturers. Also, hidden in the detail of the budget document was an announcement that the changes to the rules around qualifying expenditure for R&D activity overseas are to be deferred by 12 months to April 2024. This will be welcome news to those business that are still assessing their operating models and R&D activity centre.
Improving the accessibility and affordability of childcare which the government hops will encourage people back into the workforce is also welcome news despite being implemented in a phased approach.
It is not all positive, however. The Chancellor’s focus on long-term energy security is helpful but there is still a need to focus on the here and now. The fact that the energy support scheme for businesses is not being extended will do nothing for any manufacturers still suffering from the significant increases in energy costs.
Overall, it is a mixed budget for the manufacturing sector. However, If UK Government can create a stable and supportive business environment that promotes investment in the manufacturing sector, this will be a step in the right direction.
First the good news! There were announcements today that will be welcomed by consumers who will have more money in their wallets and by consumer brands and businesses. The welcome announcements included:
However, there are issues that the Chancellor has not addressed and which will be considered by some in the sector as missed opportunities:
Author: Neil Williams, Partner
Positive investment and change is always a help for the professional services industry. The Chancellor’s attempts at economic stimulation in energy, capital investment, tv, film and theatre, together with the enterprise zones are likely to be good news for consultancies and lawyers focussing in these areas. There were no surprises from the Chancellor which will probably be welcomed by many people given the turmoil of 2022.
The confirmation of the rise in corporation tax to 25% is a significant shift for professional services firms operating through companies and again opens the debate about which legal form best suits your business. This has never been a simple analysis. The Chancellor has added more variables through a slight alteration for companies accessing accelerated relief for capital spending and tweaks to the R&D regime which partnership are generally not able to access.
Next year’s changes to the taxation of partnerships through basis period reform resulting in a potentially critical change to financing partnership structures, means now is absolutely the time to review your strategy and whether your operating structure is still fit for purpose.
The fall in inflation will be welcome news for firms dealing with spiralling fixed costs. However, any firms that have not yet reflected rising costs in their fee structure may now find it much harder to negotiate increased fees with clients.
With real living standards dropping by 5.7%, the pressure on firm’s looking to manage their bulging people costs is not about to going away. The additional support for childcare and the changes to pension rules appear to address labour market challenges and may lead to reduced labour costs. However, the limited reach of these measures and their timing mean they may not have the hoped for impact.
Making the most of hybrid working and improving reward strategies will remain as the cornerstone of many firms’ people strategies.
Overall, the budget did not provide any big surprises but as always, there is plenty for professional services firms to consider.
Author: Ross Robertson, International Tax Partner
Amongst the measures announced in the Chancellor’s Spring Budget, there was focus on encouraging investment and innovation, and the announced reliefs will be welcome news for businesses in the Technology, Media and Telecoms sectors. Of particular interest will be the measures relating to full expensing of capital expenditure, the creation of new investment zones, increased potential for relief in respect of qualifying R&D and the extension of cultural and creative tax reliefs.
Early-stage SMEs may well be feeling some relief following the Chancellors’ R&D tax credit announcement for research-intensive companies (those that spend at least 40% of their total annual costs on qualifying R&D). The changes should mean that the current 14.5% payable credit for qualifying loss-making SMEs should effectively continue undisturbed, leading to a payment of 27p per £1 after 1 April 2023. This goes some way to addressing a concern that changes could have discouraged some future investment in tech R&D in the UK, but we will need to wait until the summer for detailed guidance and legislation to enable businesses to be certain that they qualify.
The deferral of restrictions that were due to be imposed on costs relating to R&D outside the UK will also be important for the sector. This has been deferred for a year to accounting periods beginning on or after 1 April 2024, providing innovative companies with more time to consider how to best structure their R&D activities at global scale.
It will be welcome to many media businesses that the temporary higher rates of theatre, orchestra, and museums and galleries tax reliefs will be extended for two further years from April 2023, before being reduced over the following two years. There are also reforms to the creative sector reliefs to a refundable expenditure credit, based on the RDEC scheme. This should ensure such reliefs are not adversely impacted by the implementation of the OECD Pillar 2 rules.
Full expensing of capital expenditure will be a helpful support for companies with significant capex spend plans, and will hopefully encourage that capex to be spent in the UK. Further reliefs from stamp duty land tax through business rates and national insurance contributions will be available for investment in 12 Investment Zones across the UK, centred around universities and research institutes. It is good to see that the case for investment in the UK remains strong for innovative TMT businesses.
Smaller businesses in the sector often grant EMI options to their employees as a key part of their remuneration package, for exercise on a future sale or listing. These businesses will welcome the relaxing of certain administrative requirements that need to be met at option grant, including for unexercised options already granted.
Many of the announcements made by the Chancellor at the Spring Budget will apply to Financial Services businesses in the same way as they apply to businesses in other sectors. But, as always, some FS-specific measures were announced too, this time particularly impacting Asset Managers and Insurers. Please click on this link to read our analysis of the main aspects of the Budget which Financial Services businesses will need to consider.
Author: Vicky Robertson, Tax Principal
The capital allowance announcements made by the Chancellor provide a welcome acceleration of tax relief for healthcare businesses investing in qualifying capex. These new reliefs will take effect from 1 April 2023 when the current “130% super-deduction” expires. For healthcare businesses carrying out care home construction, refurbishment work on their care home portfolio or other capital expenditure projects, the reliefs provide an opportunity to reduce the effects of the main rate of corporation tax rising to 25% from 19%.
Under the measures there will be “full expensing” (or a 100% first year allowance) for qualifying expenditure on new and unused main pool plant and machinery as well as a temporary 50% first year allowance on new and unused special rate plant and equipment. The previous announcement of the annual investment allowance remaining at £1m was also confirmed.
The extension of free childcare for working parents and the provision of “wrap around care” for primary school children, which are aimed at removing barriers from parents returning to work, may provide some of the much-needed help to alleviate staffing issues in the sector. However, as the measures are to be phased in over a number of years there will be no immediate benefit.
In terms of VAT, it was announced that medical services carried out by staff ‘directly supervised’ by registered pharmacists will be exempt from 1 May 2023. It was also announced that prescriptions for medicines supplied through Patient Group Directions will be zero-rated from Autumn 2023. This could include a wide range of health professionals such as occupational therapists, chiropodists, physiotherapists and dieticians.
Jon has many years of experience dealing with both OMB’s and large international business. If you have any questions or concerns about how the Spring Budget impacts you or your business, please get in touch with Jon or our tax team who will be happy to help.