The UK’s Chancellor of the Exchequer, Jeremy Hunt, delivered his Spring Budget 2023 on 15 March 2023. Most significantly from an international perspective, Pillar Two Policy Paper was amongst the package of documents that were published on Budget Day. Whilst light on new details, the paper is a reminder that UK implementation of Pillar Two is rapidly approaching. We now eagerly await the publication of the Finance Bill on 23 March, which we expect to include draft legislation for an Income Inclusion Rule (IIR) and Qualified Domestic Minimum Top-up Tax (QDMTT), both of which are scheduled to be introduced in the UK for accounting periods beginning on or after 31 December 2023. For further information regarding the UK implementation of Pillar Two, see our UK Pillar Two webpage.
The key announcements from a business tax perspective were:
Corporation tax - The Chancellor confirmed that the main corporation tax rate will increase from 19% to 25 with effect from 1 April 2023.
Capital Allowances - The super-deduction regime will end 31 March 2023, and will be replaced from 1 April 2023 with ‘full expensing’ - 100% capital allowances for qualifying plant and machinery. This will last for three years, to 31 March 2026, although the Government indicated that it is their ambition to make this permanent. The Government will also introduce 50% first year allowances for ‘special rate’ plant and machinery, including long life assets. These rules apply only for corporation tax purposes, and will not be available for businesses which are subject to income tax, unless they are below the Annual Investment Allowance threshold of £1m per annum.
The Government has also confirmed that the 100% first-year allowance for qualifying expenditure on electric vehicle charge-point equipment will be extended until 31 March 2025 for corporation tax, and 5 April 2025 for income tax.
Research & Development - From 1 April 2023, a higher rate of relief for loss-making R&D intensive SMEs will be introduced. SME companies whose qualifying R&D expenditure constitutes at least 40% of their total expenditure will be able to obtain an effective credit of 27p for every £1 of qualifying R&D expenditure.
The Government is still considering the responses to the consultation on merging the RDEC and SME schemes, and no decision has been made. Draft legislation on a potential merged R&D relief scheme will be published for technical consultation in the Summer. In the meantime, the previously announced restriction on the inclusion of some overseas expenditure in R&D tax relief claims is deferred for a year until 1 April 2024, to allow the government to consider the interaction of this with a potential merged R&D relief scheme.
Two new categories of qualifying R&D expenditure will be created, for data licences and cloud computing services.
It has also been announced that all R&D claims filed from 1 August 2023 will need to be filed using the new digital forms, regardless of the accounting period concerned.
Investment Zones - The Government has announced 12 Investment Zones across the UK, with the stated aim of helping drive economic growth and “levelling up” the country. The confirmed locations include the West Midlands, Greater Manchester, the North-east, South Yorkshire, West Yorkshire, East Midlands, Teesside, and Liverpool.
Each English Investment Zone will have access to £80m over 5 years, including a single five-year tax package matching that in Freeports (enhanced rates of Capital Allowance, Structures and Buildings Allowance, and relief from Stamp Duty Land Tax, Business Rates and Employer National Insurance Contributions), and grant funding to address local productivity barriers. The Government has invited local partners in eight areas in England to begin discussions on establishing Investment Zones.
The Government will work with the devolved authorities to support the introduction of Investment Zones in Scotland, Wales and Northern Ireland.
Elective accruals basis for carried interest rules - UK resident investment managers will be able to make an election to accelerate their tax liabilities in order to align their timing with the position in other jurisdictions, where they may obtain double taxation relief.
This is a Budget which provides much needed support for UK competitiveness. Businesses will be relieved that the Chancellor has acted to soften the blow from the double hit of rising corporation tax rates and the ending of the super deduction. Combined with increased R&D incentives this leaves the UK in a competitive position compared to the other G20 economies, albeit somewhere short of the most pro business tax environment anywhere.
The introduction of a temporary full-expensing window for plant and machinery is an important commitment to capital investment in the UK. The window will run from 1 April 2023 to 31 March 2026. This announcement effectively delivers the same level of tax relief for companies incurring capital expenditure on certain assets as was received under the super-deduction; it also appears to include the same clawback and tracking provisions.
Whilst the generosity and apparent simplicity of the scheme is likely to be well received; there will be little immediate benefit for loss-making businesses (e.g. start-ups). Similarly it is not clear the extent to which businesses investing in green technology will benefit.