The UK budget used to be an interesting affair, stuffed with new information for accountants, business owners and employees alike to pour over, to see how HMRC has chosen to rebalance the state’s finances.
Of course, things are a little different in 2023. The tax burden is now at its highest since the Second World War, and most changes are leaked to the press ahead of time. This has meant that changes to be implemented next month have caused fewer headlines than they would have in the past.
UK Budget: Business Taxes
However, there are some segments well worth highlighting:
For businesses, the keynote is that Corporation Tax will indeed rise from 19% to 25%, on a sliding scale on corporate profits below £250,000.
In addition, the super-deduction is ending on 31 March, and will be replaced from 1 April with ‘full expensing.’ In practical terms, this means that companies can claim 100% capital allowances for qualifying plants and machinery for at least the next three years. The government is also planning 50% first year allowances for ‘special rate’ plant and machinery, including long-life assets.
Clearly, these twin changes are detrimental to profitability — and make careful corporate tax planning ever more essential.
These rules are complex and are some of the provisions are not available for for businesses which are subject to income tax unless they are below the Annual Investment Allowance threshold of £1 million per annum. In addition, the government has confirmed that the 100% first-year allowance for expenditure on electric vehicles (EVs) charge-point equipment has been extended to Spring 2025.
However, there is good news on the Research & Development (R&D) front. SME companies whose qualifying R&D expenditure constitutes at least 40% of their total expenditure will be able to obtain an effective tax credit of 27p for every £1 of qualifying R&D expenditure.
The much-criticised plan to merge the RDEC and SME schemes is still in the consultation phase, with draft legislation likely to be published in the summer. Given recent biotech movements, including AstraZeneca’s decision to site its new $360 million state-of-the-art manufacturing plant outside of the UK, there’s a good chance that the merger plans will be scrapped.
Scaling back prior plans, the government has now announced 12 new ‘Investment Zones’ to help improve economic growth and deliver the ‘levelling up’ agenda. Locations include the West Midlands, Greater Manchester, the North-east, South Yorkshire, West Yorkshire, East Midlands, Teesside, and Liverpool.
Each zone will benefit from access to £80 million over five years, including a single five-year tax benefits package matching that found in freeports. This includes enhanced rates of capital allowance, a structures and buildings allowance, and relief from stamp duty, business rates, and employer National Insurance contributions. In addition, there will be sizeable grant funding to help resolve any local productivity issues or growth barriers.
While these investment zones are yet to materialise, there is clearly huge economic incentives to start-up or expand in these specific locations.
There are also significant reforms to the creative industry reliefs — though these are complex and only relevant to this specific sector, which is responsible for 2.3 million jobs and nearly £150 billion of the UK’s annual GDP.
While there were no announcements for income tax or National Insurance, it’s worth noting that inflation remains in the double-digits and yet the tax bands are frozen until 2028. This fiscal drag means that as wages rise, more people are dragged into paying ever more tax.
However, this has been offset to some degree by changes to pension tax relief. Aimed at inspiring those in their 50s and 60s to get back to work, or even simply to work more, the Chancellor has delivered significant reforms.
- the annual pension contribution allowance has been raised from £40,000 to £60,000
- the Lifetime Allowance, which previously stood at £1,073,100, has been abolished
- those already drawing down their pension can now save more under the Money Purchase Annual Allowance, which has increased from £4,000 to £10,000
Complicating matters, the Labour Party has advised that they will reverse these reforms should they win the next general election, currently scheduled for January 2025.
This makes solid tax planning both complex and ever more essential. For example:
- individuals with large pension pots may wish to draw down more in the next tax year than normal
- higher earners may wish to consider whether they can put off non-essential expenditure to maximise contributions in the next tax year
- retirees may reflect on whether the increased MPAA might make returning to work part-time worthwhile
Other key measures
One important, yet underreported change, is to alcohol duty which is increasing with RPI inflation in August. While there are increases to draught relief, this could represent yet another hammer blow to the hospitality sector, which is already reeling from the pandemic, inflation, and reduced customer spend.
Domestic energy support is also continuing at the current cap of £2,500 per annum for the so-called ‘typical’ household, while the Energy Bills Relief Scheme, which supports businesses and other non-domestic energy users, is to be replaced by the Energy Bills Discount Scheme through to 31 March 2024.
Finally, the government has doubled the maximum possible sentence for tax fraud to 14 years and is consulting on the introduction of a new criminal offence for promoters of tax avoidance who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme. In addition, it is planning to speed up the disqualification of directors of companies involved in promoting tax avoidance.
Importantly, this crackdown on tax avoidance is aimed at schemes which skirt dangerously close to evasion — the usual EIS, SIPP, ISA and trusts are still very much encouraged.
The most important points for businesses to consider are the changes to corporation tax and R&D reliefs. For individuals, it’s the likelihood that fiscal drag combined with inflation will hit their net pay — and the ability to limit this effect through the more generous pension scheme.
For many, the best thing to do is to dedicate tax affairs to an expert, both to become as tax efficient as possible, and to stay on the right side of HMRC.