The chancellor, Jeremy Hunt, delivered a range of tax measures in yesterday's Budget to support an agenda centred on increasing business investment to enhance productivity and expanding the domestic workforce to encourage growth.
The government's first full budget in nearly 18 months was accompanied by growth and borrowing forecasts from the Office of Budget Responsibility (OBR) with the economic and fiscal outlook more positive than the previous forecast in November with the UK expected to avoid a technical recession this year.
Business tax measures
Help for R&D
The government announced some changes to improve the landscape for companies undertaking intensive research and development (R&D). It has announced that it will introduce from 1 April 2023 an increased rate of relief for loss-making "R&D intensive" small and medium-sized enterprises (SMEs). Eligible companies for which qualifying R&D expenditure constitutes at least 40% of total expenditure will be able to claim a higher payable credit rate of 14.5% for qualifying expenditure.
Despite being presented as an increased rate for eligible SMEs, it is effectively a partial reversal of the reduction in R&D relief for SMEs (from 14.5% to 10%) that was announced in the Autumn Statement and due to take effect from 1 April 2023. Although this will be welcome news for some companies, for SMEs that are carrying out R&D but are not within the new definition of R&D intensive SME, the reduction in credits previously announced will still apply.
The government also intends to keep open the option of implementing a merged R&D scheme from April 2024. Draft legislation on a merged scheme will be published for technical consultation alongside the draft Finance Bill in the summer with a summary of responses to the consultation.
Finally, the previously announced restriction on some overseas R&D expenditure will now come into effect from 1 April 2024 instead of 1 April 2023
Despite confirmation of the increase in the rate of corporation tax to 25% from 1 April 2023, there was consolation for businesses in the announcement of a new capital allowances regime to introduce full expensing for the next three years (although the change does require companies to be profitable to get the full benefit).
Companies incurring qualifying expenditure on the provision of new plant and machinery on or after 1 April 2023 but before 1 April 2026 will be able to claim one of two temporary first-year allowances: a 100% first-year allowance for main rate expenditure – known as full expensing – or a 50% first-year allowance for special rate expenditure. The government intends to make this measure permanent "when fiscal conditions allow".
As had already been announced, the temporary £1m limit for the annual investment allowance will be made permanent with effect from 1 April 2023.
The chancellor announced the creation of 12 "investment zones", first proposed by Liz Truss last year, but now with a more targeted reach. The zones (which will be in areas that have underperformed economically) aim to accelerate R&D in high-potential knowledge-intensive growth clusters across the UK and will be focused on a number of key sectors – technology, creative industries, life sciences, advanced manufacturing and the green sector.
The zones 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. This, when coupled with enhancements to R&D relief, should encourage further investment in the those targeted sectors and will also help support the government's levelling-up agenda.
The government has announced that it is simplifying the process for granting enterprise management incentive (EMI) options. From April 2023, the requirement for a company to set out details of share restrictions within the option agreement and the requirement for a company to declare that an employee has signed a working time declaration will be removed; it is understood that these changes will also apply to unexercised EMI options granted prior to April 2023.
From April 2024, the government will extend the deadline for a company to notify HMRC of the grant of an EMI option, from 92 days following grant to the 6 July following the end of the tax year.
The government will also be launching a call for evidence on the Share Incentive Plan and Save as you Earn (SAYE) tax-advantaged all-employee share schemes. The government will use the call for evidence to consider opportunities to improve and simplify the schemes.
As previously announced, the government will legislate in the Spring Finance Bill 2023 on changes to the Company Share Option Plan regime.
Reforming film, TV and video games tax reliefs
The government has announced that it will legislate to reform the film, TV and video games tax reliefs to refundable expenditure credits (with the current tax reliefs closing to new productions from 1 April 2025). The design of the expenditure credits will be based on the R&D expenditure credit. Full details of the expenditure credits will be published alongside draft legislation in summer 2023 and stakeholders will be able to comment.
Personal tax measures
The chancellor announced various measures to encourage individuals to return to work and to remove incentives to leave the labour market due to pension tax limits. The chancellor announced that the annual allowance for pension savings will be increased from the current limit of £40,000 per year to £60,000. The Money Purchase Annual Allowance and the minimum Tapered Annual Allowance (TAA) will both be increased from £4,000 to £10,000, while the adjusted income threshold for the TAA will also be increased from £240,000 to £260,000.
Most significantly (and surprisingly), the chancellor announced that the lifetime allowance, which had been frozen at £1,073,100 until 2025/26, will be abolished with effect from 6 April 2023. The maximum Pension Commencement Lump Sum for those without relevant protections will be retained at its current level of £268,275 and will be frozen thereafter. Lump sums currently taxed for some individuals at 55% above the lifetime allowance will be taxed at an individual's marginal rate of income tax. These changes will also take effect from 6 April 2023.
Improvements to Real Estate Investment Trusts (REITs)
The government announced that in addition to the changes already outlined around REITs, which will address unnecessary barriers to entry and ensure the rules are operating as intended, the government will also reduce administrative burdens for certain partnerships investing in REITs. The changes will variously apply from 1 April 2023 and Royal Assent of the Spring Finance Bill 2023.
Qualifying asset holding companies
The government has also announced that it will legislate to make a number of targeted changes so that the regime for qualifying asset holding companies (QAHC) is more widely available to investment fund structures. These will fall within the QAHC regime's intended scope and the rules better achieve their intended effect.
The reform of VAT on fund management
Following the consultation on proposed reform of the VAT rules on fund management to improve legal clarity and certainty, which closed in February (and to which we responded), the government is considering the responses and continuing to discuss the proposals with interested stakeholders. The government will publish its response to the consultation in the coming months.
Carried interest rules
The government has announced that it will also legislate in the Spring Finance Bill 2023 to provide a new elective accruals basis of taxation for carried interest. 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 obtain double taxation relief. The measure will apply from 6 April 2022.
Genuine diversity of ownership (GDO)
The government will make changes to the GDO condition in the QAHC, REIT and non-resident capital gains (NRCG) rules. The GDO condition is intended to prevent funds that are only open to a small number of predetermined investors from benefitting from those regimes.
Sovereign immunity from direct taxation
Following a consultation on sovereign immunity from direct taxation the government has decided that there will be no change to the current exemption and that it will continue to operate as it does now. We had responded to the consultation and it is welcoming to see that the government has taken on board comments and constructively worked with respondents to the consultation before making any changes or, in this case, not proceeding with the proposed changes to the exemption.
Previously announced measures
The government also confirmed that the Spring Finance Bill will include the measures announced at the Autumn Statement 2022 which included: the introduction of the new Electricity Generator Levy, the increase in Seed Enterprise Investment Scheme benefits available from April 2023, and the implementation of the globally agreed G20-OECD Pillar 2 framework in the UK (the global minimum tax).
Osborne Clarke comment
The focus of the spring Budget was one of growth – with the chancellor himself announcing that he wants to have the "most pro-business pro-enterprise tax regime anywhere". Although many businesses, in particular in the technology and life science sectors, will welcome the announcements made, it will have to be seen whether the changes help with the chancellor's growth agenda, particularly given the OBR's predicted drop in real incomes over the next two years.
Although the chancellor did not announce any cuts in actual tax rates, this is perhaps not surprising given the current state of the government's finances. It may also pave the way for possible tax cuts to be announced in the Autumn Statement ahead of the general election in 2024.
The Spring Finance Bill, which will introduce the measures announced (in this Budget and also in last November's Autumn Statement ), will be published on 23 March 2023. The government has also announced that it will bring forward a further set of tax administration and maintenance announcements later in the spring (none of which will require legislation in the Spring Finance Bill or have an impact on the government's finances at this stage).
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