Chancellor of the Exchequer Jeremy Hunt addressed the UK parliament at 12:30pm today to deliver his Spring Budget 2023. Indeed, he was the first Chancellor to have the privilege of appearing in Downing Street with the famous red budget box since Rishi Sunak back in October 2021, his two predecessors not having survived long enough in office to deliver a full scale version of a fiscal event.
The Chancellor did not listen to business and his backbenchers and back down on the corporation tax rate rise but for many this will be offset in cash tax terms by the 100% plant and machinery allowances and enhanced R&D tax credits for large companies. He has at least listened to our call with improvements on previous proposals for R&D relief for SME's.
Of course, for public companies, the increase to 25% means that the tax rate will be increasing once deferred tax is taken into account so Earnings per Share (calculated after tax) will be reduced for those in the public arena.
In this special edition of Tax Advisor Update, our team of experts was on hand to analyse the announcements and summarise the most important developments.
BUSINESS TAX MEASURES
Corporation Tax Rates
The Chancellor reaffirmed that the current mainstream rate of corporation tax of 19% will rise to 25% with effect from 1 April 2023 albeit he was at pains to point out that this remains the lowest rate in the G7 group of advanced economies.
Further, based on HM treasury estimates, only 10% of all UK companies are expected to pay the full 25% rate. The current 19% tax rate will be maintained for businesses with profits of £50,000 or less (close investment holding companies will pay at the full 25% rate), and businesses with profits between £50,000 and £250,000 will pay a marginal rate of tax between 19% and 25%.
The big give away in the business tax arena was the announcement of a new regime permitting the full expensing of qualifying capital expenditure.
For expenditure incurred on or after 1 April 2023 corporation taxpayers will be permitted to deduct 100% of the cost of plant and machinery where that would otherwise have qualified as an addition to the main rate pool. A 50% annual deduction will be available for expenditure that would otherwise have been treated as special rate pool assets.
Both measures will initially apply for three years up to 31 March 2026 but the Chancellor clearly stated that his long term ambition is to make this permanent, particularly if it achieves the desired uptick in business investment.
This will go some way to offsetting the impact of the rise in the corporation tax rate albeit arithmetically the end result is similar to that achieved by the temporary 130% super-deduction which expires on 31 March 2023. Businesses will welcome the fact that the new regime does appear to be more straightforward in its application.
It appears that the full-expensing is only available to companies however this is unlikely to be of practical significance as the Annual Investment Allowance, which permits both companies and unincorporated businesses to immediately write-off their first £1,000,000 of capital expenditure, is to be made permanent from 1 April 2023.
Research & Development (R&D)
An additional level of relief was announced to support "R&D intensive" small and medium sized companies (SMEs) where at least 40% of their total expenditure is qualifying R&D expenditure. Where such SMEs are loss making they will be entitled to a 14.5% payable credit in respect of expenditure incurred since 1 April 2023. This is the same level of credit that was previously available to all SMEs. Non-R&D intensive SMEs will now only receive a 10% credit as previously announced.
Whilst prima facie this looks like good news, when combined with the impact of the reduction in the additional deduction from 130% to 86% announced in the Autumn Statement even the most innovative companies will see an effective reduction in the available cash credit, from 33.3% to 27%. Profitable research-intensive companies will see no differential benefit. The bar has been set very high to be considered "research intensive", and government guidance states also that this new relief will take longer to process, delaying cash for those companies that need it most. Meanwhile, loss-making SMEs who do not meet the threshold will see their level of credit reduced to 18.6%.
The consultation on merging the SME and RDEC schemes closed on Monday, and it is expected significant further changes will be announced to the schemes alongside the draft Finance Bill in July.
One significant development is that the previously announced restriction on overseas expenditure will now be delayed until 2024 once the direction of travel has been determined on merging the schemes.
Taken together, the measures in the Budget go some way to retract the previously announced cuts to SME relief, though hardly amount to a coherent drive to convince companies to invest.
The government confirmed its intention to include legislation in Spring Finance Bill 2023 to implement the globally agreed G20-OECD Pillar 2 framework. Pillar 2 is a mechanism designed to ensure large multinational enterprises pay a minimum 15% level of tax on the income arising in each jurisdiction where they operate.
The changes will apply for accounting periods beginning on or after 31 December 2023 whereby there will be an Income Inclusion Rule which will require large UK headquartered multinational groups (those with over €750 million of annual global revenues) to pay a top-up tax where their foreign operations have an effective tax rate of less than 15%.
There will also be a supplementary domestic top-up tax rule which will require large groups, including those operating exclusively in the UK, to pay a top-up tax where their UK operations have an effective tax rate of less than 15%.
Transfer Pricing Documentation
For accounting periods beginning on or after 1 April 2023 large multinational businesses operating in the UK will be required to keep and retain transfer pricing documentation in a prescribed and standardised format which is set out in the OECD's Transfer Pricing Guidelines (Master File and Local File). This is designed to give businesses more certainty on the appropriate documentation they need to keep and enable HMRC to identify risks more effectively. This will be legislated for in Spring Finance Bill 2023.
HMRC also confirmed that they will continue to consult on the introduction of a Summary Audit Trail which would be a document detailing the steps undertaken by the UK business in preparing its transfer pricing documentation.
Amendments to Corporate Interest Restriction Rules (CIR)
There are a number of minor amendments to the CIR rules to address certain technical issues and anomalies where the regime does not currently operate as intended. There are more than twenty revisions to be legislated for in the Spring Finance Bill.
It is recommended that any taxpayers that have experienced specific quirks as to how the rules apply to their specific facts and circumstances revisit the situation. This is particularly true for non-resident landlords where amendments covering the interaction of CIR with brought forward income tax losses will have retroactive effect.
The government announced that they are to establish 12 Investment Zones across the UK, subject to successful proposals. Each zone that receives approval will have access to interventions of £80 million over 5 years. The government will legislate in Spring Finance Bill 2023 to allow designation of special tax sites in or connected with Investment Zones.
Once designated, special tax sites will benefit from a package of tax reliefs including Stamp Duty Land Tax relief, enhanced capital allowances for plant and machinery, enhanced structures and buildings allowances, and secondary Class 1 National Insurance contributions relief. The reliefs will be time limited with the exact end date confirmed at a future date.
Real Estate Investment Trusts (REITS)
From the date of Royal Assent of the Spring Finance Bill, the requirement for a REIT to hold a minimum of three properties will be removed, provided that it holds a single commercial property worth at least £20 million.
For disposals taking place after 1 April 2023 the rule that deems a disposal of property within three years of being significantly developed as being outside the property rental business changes so that the valuation used when calculating what constitutes a significant development better reflects increases in property values.
Both of these measures should enhance the competitiveness of the UK REIT regime. There is also a welcome administrative change in that property income distributions paid to partnerships may now be partly paid gross depending on the tax status of each of the partners.
Qualifying Asset Holding Companies (QAHCs)
The Spring Finance Bill will contain a number of measures to better align the QAHC regime with the intended scope and policy objectives. Some of these measures will be retroactive in effect. Taxpayers who have previously encountered issues with meeting the eligibility requirements may wish to revisit their analysis.
The proposed employer National Insurance measures announced in the Autumn Statement have been confirmed to take effect from 6 April 2023. This will freeze the rate at which employers start to pay Class 1 Secondary NICs for their employees at £9,100 per year from April 2023 until April 2028. Whilst seemingly innocuous this is actually a significant revenue raiser estimated to be worth up to £5.7 billion a year to the exchequer.
Following on from the closure of the Office of Tax Simplification, a consultation has been issued on simplifying tax to support modernisation and business growth. The consultation is seeking views on HMRC's income tax services, in particular the interaction between Pay As You Earn and the Income Tax Self-Assessment tax regime and how "digitalisation" can help.
Employers will be encouraged to support people back to work through the expansion and improvement of employer occupational health provisions. A consultation is to follow, which will include options for increasing investment in occupational health and tax incentives. There are limited tax exemptions in existence, so we welcome any additional tax incentives but are mindful this is likely to fall as an additional cost burden to employers.
Employee Share Schemes
There was some welcome news for companies incentivising their staff with EMI options. In addition to relaxing certain technical aspects on how these options are documented from 6 April this year, the time period for notifying the grant of the options to HMRC will be moved to the 6 July following the tax year in which the options were granted. The change to the notification deadline will apply from 6 April 2024.
Currently employers are required to notify HMRC within 92 days of grant – a deadline which can easily be missed but which HMRC take very seriously. The new deadline for notification will tie in with the annual reporting deadline for all share based employee incentive arrangements. A sensible approach which will reduce administrative time and costs for companies offering employees these particularly tax-efficient share options.
The above changes were implemented following a call for evidence on EMI options. A similar call was made in respect of CSOP options which also resulted in positive changes that were re-confirmed in today's Budget, including an increase in the value of shares under option from £30,000 to £60,000 per employee, and a widening of the type of shares over which CSOP options can be granted. A call for evidence on the remaining tax-advantaged share schemes, the Share Incentive Plan and the Save As You Earn scheme was also announced within today's Budget, with further details to follow.
Income Tax Rates
The changes to income tax rates and allowances to come into effect from 6 April 2023 were previously announced in the Autumn Statement and these will now be legislated for. By way of reminder, there is a freezing of personal allowances; a reduction in the threshold for the 45% additional rate to £125,000; and, a reduction in the capital gains tax annual exempt amount to £6,000.
Legislation is to be included in Spring Finance Bill 2023 to increase the Annual Allowance for pension contributions from £40,000 to £60,000. This is the maximum amount that an individual can contribute each year from their gross income without incurring a tax charge which effectively recoups some of the relief given.
The Lifetime Allowance (LTA) (which is the maximum amount of tax relievable pension savings an individual can benefit from over the course of their lifetime) is to be abolished altogether. Individuals may contribute to their pension over these limits, but currently they will be subject to a tax charge on any amounts saved above the LTA. Under the measures this LTA charge should no longer apply from 6 April 2023.
The changes to pensions tax relief limits are intended to persuade those currently considering retirement to remain in employment, and to encourage those who have already left the workforce to return.
The government is introducing a new elective accruals basis of taxation for carried interest. Applicable from 6 April 2022, this will allow UK resident investment managers to accelerate their tax liabilities in order to align their timing with the position in other jurisdictions where they may also suffer tax on the income. This is welcome news for taxpayers, where timing differences with the recognition of the income cause problems for claiming double taxation relief.
Seed Enterprise Investment Scheme
As previously announced, the existing limits that apply to company access and use of the SEIS and the investment amounts on which individuals can claim tax reliefs are being changed. The maximum amount a qualifying company can raise is to be increased, conditions around the size and age of the company relaxed and the amount eligible for tax relief for investors is to be increased.
It was a quiet Budget from an indirect tax perspective. Items of note included the following:
- The government gave an update following the consultation on the proposed reform of the VAT rules on fund management which closed in February. They are currently considering their response which will be published "in the coming months".
- The government will extend the VAT exemption on healthcare to include medical services carried out by staff directly supervised by registered pharmacists. This simplification will take effect from 1 May 2023.
There will be a rise in air passenger duty where domestic flights will increase by 50 pence to £7 and long haul and ultra-long-haul rates are to increase by £1 in line with the government's environmental objectives. Most other indirect taxes such as landfill tax; aggregates levy and plastics packaging taxes will undergo inflationary rises.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.