Spring Budget 2023: business taxes
In this section we analyse the Chancellor’s announcements on business taxes and highlight some of the practical implications.
- Full 100% expensing for qualifying plant and machinery
- Loss-making R&D-intensive SMEs to receive £27 for every £100 of qualifying R&D expenditure
- Extra creative industry tax relief for theatres, orchestras, museums, and galleries
- 12 new Investment Zones with a 5-year package of tax incentives
New full 100% expensing regime for capital expenditure on qualifying assets
From 1 April 2023, companies will be able to claim 100% and 50% first year allowances for qualifying capital expenditure on new main rate and special rate plant and machinery expenditure, respectively.
The Spring Finance Bill 2023 will include measures allowing companies to fully expense capital expenditure on new main rate plant and machinery, for a period of three years starting from 1 April 2023. Under this regime, businesses will save 25p on every £1 invested, so a 25% cash tax saving. The 50% first-year allowance for expenditure on new special rate and long-life assets has also been extended.
Both measures will be in place until 31 March 2026, with the intention to make the measures permanent when fiscal conditions allow.
In addition, measures first announced in the Autumn Statement 2022 will be legislated by the Government. This extends the first-year allowance on electric vehicle charge points by two years to 31 March 2025 for corporation tax, and 5 April for income tax. It also extends the £1 million Annual Investment Allowance indefinitely.
The introduction of full 100% expensing for capital expenditure on qualifying plant and machinery will be welcomed by companies, particularly given the end of the current super deduction which coincides with the increase in the corporation tax main rate to 25% from 1 April 2023. The intention to make this a permanent feature will also be well received and provide businesses with some certainty in undertaking investment decisions.
It is disappointing the relief is only available to companies within the charge to corporation tax and excludes individuals and partnerships containing individuals.
This is potentially a missed opportunity to better align the capital allowances regime with the Government’s wider strategies, particularly as investment decisions made now will impact the UK’s ability to meet its net zero target by 2050.
Whether or not this type of blanket untargeted relief provides the best return for both the Government and taxpayers is also debatable. The Government had stated that the previously introduced super deduction was costly to operate, and it is difficult to see how the introduction of full expensing will provide much better value for money.
When will it apply?
From 1 April 2023.
Reforms to research and development tax reliefs
A new increased research and development (R&D) tax credit rate for highly innovative loss-making SMEs has been introduced. Previously announced restrictions to overseas expenditure will be delayed a year.
Major reforms have been announced to both R&D relief schemes previously. Most of these changes will take effect for accounting periods commencing on or after 1 April 2023.
The Chancellor announced today, however, that R&D intensive loss-making SMEs with qualifying R&D expenditure worth 40% or more of total expenditure for an accounting period will qualify for a higher tax credit of 14.5%. This will give qualifying loss-making companies a cash credit worth £27 for every £100 spent and negates the impact of the reduction in rates of relief for companies claiming under the existing SME scheme.
The Government also previously announced restrictions on the inclusion of overseas expenditure, but these measures have been delayed by a year, and will come into effect from 1 April 2024.
Other R&D tax reforms include:
- Categories of qualifying expenditure to include both cloud computing services and data licences
- The definition of R&D has been extended to encompass both pure mathematics and mathematical activities that contribute to R&D projects in other fields of science and technology
- Using new digital forms, companies will be required to both notify HMRC of the intention to make an R&D claim, if they had not made a claim before; and
- From August 2023 companies must provide additional information when making R&D claims, to assist HMRC with compliance checks
The Government is considering responses to the consultation on the form of a single R&D scheme to merge the SME and RDEC regimes, with draft legislation for a merged scheme expected to be released in Summer 2023 for technical consultation.
HMRC is also due to provide more accurate estimates of error and fraud to the Public Accounts Committee by summer 2023, along with a clear action plan to reduce error and fraud. Any further measures to combat this error and fraud will be announced thereafter.
We support the Government’s intention to combat error and fraud within the R&D regimes; however, it is our view that reforms announced in the Spring Budget 2023 will be ineffective in targeting fraudulent claims and in addressing the limitations with HMRC’s compliance processes.
While the enhanced relief for R&D intensive loss-making SMEs provides a welcome respite for those that meet the thresholds, it will result in a yet greater compliance burden for HMRC to ensure claimants are accurately meeting the 40% threshold.
We welcome the delay in implementing the restriction on claiming costs on overseas workers. While we support the intention to incentivise UK employment and activities, additional time is required to enable companies to prepare for this significant change and to enable the Government to further consider feedback from industry and advisors on this issue.
When will it apply?
The new regime for R&D intensive SMEs will come into effect on 1 April 2023.
The previously announced changes on R&D reform will take effect for accounting periods commencing on or after 1 April 2023, except the requirement to provide additional information which will apply to all claims made on or after 1 August 2023. Draft legislation is expected to be published summer 2023 on the merging of RDEC and SME regime with final measures currently planned to be implemented April 2024.
Reform of creative industry reliefs and extension of cultural reliefs
The Government announced two new expenditure credits: audio-visual expenditure credit (AVEC) and video games expenditure credit (VGEC). The higher rates of cultural tax reliefs will also be extended for two more years.
The AVEC will replace the four existing film and TV tax reliefs, although specific eligibility criteria for each will remain.
The rates of the credit are:
- 34% for film, high-end TV and video games
- 39% for children’s TV and animations
New productions will not be able to claim under the current tax reliefs after 31 March 2025, although video games that have not concluded development, and films and TV programmes that have not concluded principal photography before 1 April 2025, may continue to claim under current rules until 31 March 2027. An opt-in to the new regime will be available for productions that have claimed under the existing reliefs.
The VGEC eligibility requirements include that at least 10% of expenditure on goods and services are used or consumed in the UK.
Theatre tax relief (TTR) and museums and galleries exhibitions tax relief (MGETR) rates will be maintained at their existing rates of 45% and 50% for non-touring and touring productions respectively, until 31 March 2025. Following this, the rates will reduce to 30% and 35% until 1 April 2026, and then to 20% and 25% respectively.
Orchestra tax relief (OTR) is also maintained at 50%, reducing to 35% from 1 April 2025 and 25% from 1 April 2026.
The dates and rates are summarised below:
|Theatre tax relief, museums and galleries exhibition tax relief|
|Orchestra tax relief|
*MGETR expires after 31 March 2026 and no expenditure after this date will qualify for relief.
The theatre, orchestra and museum and galleries exhibition tax reliefs will all introduce changes to qualifying or eligible expenditure by requiring that qualifying expenditure is incurred on goods and services that are consumed in the UK, rather than provided from within the UK or EEA as currently permitted. Generally, EEA expenditure will no longer qualify for relief from 1 April 2024, although transitional reliefs are available until 31 March 2025.
The reforms to the creative industry reliefs are on trend with wider research and development relief reforms and consultations, with a move to an ‘above the line’ expenditure credit rather than an enhancement to tax-deductible expenses which can be surrendered for a repayable tax credit.
The two-year extension of the higher rates for theatre, orchestra and museum and galleries exhibition tax reliefs will be welcomed by these sectors, however those with non-UK activities and costs may need to assess the changes and consider their operations in further detail.
When will it apply?
AVEC and VGEC will be available for companies with accounting periods ending on or after 1 January 2024. The phasing out of existing creative industry reliefs will be from 1 April 2025. Cultural tax reliefs will be maintained at current rates until 1 April 2025, before reducing.
12 investment zones will benefit from preferential fiscal tax incentives available over a five-year period as well as planning liberalisation and wider Government support, to boost development and growth.
Each zone will have access to funding of £80 million over a 5-year period. The tax incentives will be similar to those previously announced for Freeports, including:
- Business rates: 100% relief from business rates on newly occupied business premises, and some existing businesses where they expand in Investment Zone tax sites. Councils hosting investment zones will benefit from 100% retention of the growth in business rates over an agreed baseline for 25 years
- Capital allowances: 100% first-year allowance for companies’ qualifying expenditure on all new plant and machinery assets for use in tax sites
- Structures and buildings allowances (SBA): enhanced 10% rate of SBA, compared to the standard rate of 3%. This allows businesses to significantly accelerate tax relief for the cost of qualifying non-residential investment, relieving 100% of their cost over 10 years
- Employer National Insurance contributions (NICs): Employer NICs will be zero-rate on earnings up to £25,000 per year for any new employee working in the tax site for at least 60% of their time. This relief can be applied for 36 months per employee. Earnings above the £25,000 threshold will be charged at the usual rate above this level
- Stamp Duty Land Tax (SDLT): full SDLT relief for land and buildings acquired for commercial use or development for commercial purposes
The following locations have been proposed for the investment zones in England:
- The proposed East Midlands Mayoral Combined County Authority
- The Greater Manchester Mayoral Combined Authority
- The Liverpool City Region Mayoral Combined Authority
- The proposed Northeast Mayoral Combined Authority
- The South Yorkshire Mayoral Combined Authority
- The Tees Valley Mayoral Combined Authority
- The West Midlands Mayoral Combined Authority and
- The West Yorkshire Mayoral Combined Authority
At least one investment zone is proposed in each of Scotland, Northern Ireland and Wales, with the locations still to be determined.
Shortlisted areas are invited to develop an investment zone proposal, in coalition with local authorities and partners.
Investment zones are not a new concept, and their success is often debatable. Most significant benefits have been observed where the zones build on existing strengths or infrastructure.
The 12 investment zones are a scaling down from the 38 previously announced and present a change in focus.
The proposed zones are likely to be close to existing leading universities and research institutes and are intended to drive growth in five key sectors: Life sciences, Creative industries, Digital technology, Advanced manufacturing and Green industries.
With stability and longevity of commitment being key factors in maximising investment value, the introduction of investment zones should help align public and private investment in such areas.
The Chancellor referenced Canary Wharf and Liverpool Docks as example success stories. The policy focus on existing institutes and specific sectors may help create centres of excellence, however, questions may remain on their ability to help drive long-term regeneration of other deprived areas; particularly with no zones located south of the Midlands.
When will it apply?
Government expects funding to commence in the tax year 2024/25.
Changes to the genuine diversity of ownership condition for investment funds
Separate legal entities within investment fund structures will be able to meet the genuine diversity of ownership (GDO) condition providing that they form part of a GDO qualifying multi-vehicle arrangement, otherwise investors cannot benefit from certain tax benefits.
A number of tax regimes include a condition for GDO. Such regimes include:
- Qualifying asset holding companies (QAHC)
- Real estate investment trusts (REIT)
- Non-resident chargeable gains (NRCG)
The intention of the GDO condition is to prevent investment funds that are open only to a small number of predetermined investors from obtaining the tax benefits of these regimes.
The GDO condition as currently legislated requires each separate legal entity within a fund to be considered in isolation. This can mean that an entity within a wider fund arrangement does not qualify for one of the regimes above, although the wider arrangement could meet the GDO requirements when taken as a whole.
The Spring Finance Bill 2023 will amend the GDO condition to allow an individual entity to satisfy the condition where it forms part of a GDO qualifying multi-vehicle arrangement, which an investor would reasonably regard their investment to be in.
Fund structures can often involve a number of legal entities for a range of legal, regulatory, commercial and financial requirements. The relaxation of the strict GDO conditions is a positive move and supports the original intention of the policy while allowing funds a degree of flexibility in their choice of structure.
When will it apply?
From Royal Assent of the Spring Finance Bill 2023.
Removal of tax implications for insurers in financial distress
Insurers and annuity policyholders will be protected from tax consequences in cases where the insurer’s liability is written down by court order due to financial distress.
Recently proposed legislation in FSMA 2000 s377A broadly provides the courts with powers to write down the liability of an insurer that is in financial distress.
From a corporation tax perspective, accounting credits arising from the reduction in liabilities could be treated as taxable income in the hands of the insurer. The Spring Finance Bill 2023 will insert new legislation to prescribe that such credits are not taxable on the insurer where its liability is written down. A matching provision will prevent a tax deduction in respect of a write-up or variation to the write-down order where the previous write-down was not brought into tax.
The policyholder of an annuity written down in this way will also be protected, namely by allowing for the reduction of pre-2015 lifetime annuities and dependant annuities, which is not currently permitted. Additionally, for a pre-6 April 2015 lifetime annuity or dependant annuity held under a registered pension scheme, a statutory instrument will provide that such write-downs are not considered a surrender of benefits. Furthermore, eligible individuals will be allowed to receive top-up payments from the Financial Services Compensation Scheme without triggering an unauthorised payments charge. The overall intention is to ensure that such individuals are not tax disadvantaged in these circumstances.
Financial distress and insolvency is a complex and difficult area for all parties involved. Tax legislation often provides for relief around debt reconstructions in wider insolvency arrangements and it is pleasing to see a change in financial services law accompanied by complementary protection from negative tax implications.
Insurers, policyholders, insolvency practitioners and their advisers will need to consider the application of this new legislation and be sure that the relevant conditions are met before committing to a course of action.
When will it apply?
From the date of Royal Assent of the Spring Finance Bill 2023.
Consultation on the reform of the cash basis for small businesses
The proposals outlined for consultation would see more businesses brought within the scope of the cash basis for calculating trading profits.
The traditional method for calculating trading profits requires businesses to recognise income and expenditure on the basis of when they are ‘earned’ and ‘incurred’. The cash basis provides a simpler alternative allowing small businesses to report and pay their tax based upon the income received less expenses actually paid within the given accounting period.
The consultation will review the impact of increasing the current turnover threshold of £150,000, to bring more businesses within the scope of the simplified measure. The proposal will also consider relaxation of the associated loss relief restrictions and the limit imposed on relief for interest incurred.
Small businesses will welcome measures that simplify reporting requirements. Allowing traders to offset losses against their other income will remove the penalty currently imposed on loss-making businesses for opting to simplify their affairs.
Some traders may benefit from retaining the standard method of calculating profits, depending on their specific circumstances.
When will it apply?
Business rates review
The Budget highlights the ongoing review of the UK business rates system and the Government’s commitment to consult and re-shape policy. Two new consultations are launched whilst we await publication of responses to two recently closed consultations.
The Government is launching two new consultations: one on providing ratepayers with more information on their business rates valuations, and the second on measures to combat avoidance and evasion.
The Government has also promised to publish responses to two closed business rates consultations. Mentioning the non-domestic rating information consultation, which closed in February 2022, the Government reconfirmed its commitment to reform and promised to set out further detail on how reform will be delivered. A summary of responses to its consultation and impact assessment on digitalising business rates is also awaited. This considers the implementation of new legislation and an integrated system for ratepayers to interact with central Government.
Little detail on business rates was delivered in the Spring Budget, however, it is clear that business rates remain firmly on the agenda for review.
The four business rates consultations referred to in the Budget indicate that the Government is committed to bringing business rates into line with other taxes through digitalisation, the introduction of ratepayer compliance through the provision of information, and the tightening of measures to combat business rates avoidance and evasion.
We await more detail on reforms; every ratepayer will need to be ready to understand the rules quickly when the changes come.
When will it apply?
The consultation on disclosure on business rate valuations closes 7 June 2023. The second consultation is yet to be published.
Changes to Real Estate Investment Trust rules
Changes are proposed to the rules applying to Real Estate Investment Trusts (REIT) to help boost their competitiveness. In particular, the amendments should make it easier for smaller entities to enter the REIT regime. Additionally, changes to rules concerning distributions made to partnerships should mean they can receive distributions free of withholding tax in certain situations.
One of the current requirements to enter the REIT regime is that the property rental business must consist of a minimum of three properties. This requirement is being relaxed such that it will be possible to enter the REIT regime where a single property is held, provided it is a commercial property with a value of at least £20 million.
Also under the current rules, tax may be deducted from property income distributions made by a REIT to a partnership, notwithstanding that the distribution could have been received gross by the partners had they invested into the REIT directly. The proposed changes ensure that a distribution can be paid gross to a partnership to the extent that the income belongs to partners that would have been entitled to receive the income gross if they had invested directly into the REIT.
The REIT remains an important vehicle for real estate investment in the UK. These measures, which seek to improve access to the regime and remove anomalies in its operation, will help its attractiveness.
When will it apply?
A mix of 1 April 2023 and Royal Assent of the Spring Finance Bill 2023.
Changes to corporate interest restriction
A substantial number of amendments will be made to the corporate interest restriction (CIR) rules, covering issues such as unintended mismatches and anomalies, elections and deadlines.
The CIR rules exist to limit large businesses reducing their taxable profits via excessive interest expenses in the UK.
A number of changes will be implemented to assist the legislation in meeting its aims, reduce anomalies, unfair results and reduce administration. These include:
- Allowing groups to carry forward interest allowance where a new holding company is inserted part way through a period of account
- Removing the power for HMRC to issue determinations where there is no appointed reporting company, and also extending the time limit for HMRC to appoint a reporting company to four years
- Removing mismatches between tax-interest and group-interest amounts with relevant non-lending relationships, or with the commencement of a business
- Clarification of the impact of double tax relief on tax-EBITDA
- Extending the permissible term of qualifying equity notes from 50 years to 100 years to allow relief for such finance costs to be included within the net group interest expense
- The treatment of capitalised interest on assets appropriated from trading stock
- Allowing non-consolidated investment elections in respect of transparent entities such as limited partnerships and property unit trusts
- The alignment of election deadlines and other changes to the rules around public infrastructure
Whilst mechanical in nature, the CIR rules are complex and often require full and detailed analysis to prepare accurate calculations and consider relevant elections. It is not uncommon to find mismatches or unexpected differences between company and group interest expenses, and attempts to harmonise the rules are welcome.
Some borrowers may have also wished for a rise in the £2 million de minimis threshold, which may now be more easily breached given recent interest rate rises. In light of increased interest costs, businesses potentially within the scope of CIR should consider their likely future borrowing requirements and submitting abbreviated interest restriction returns on an annual basis. This may preserve unused interest allowance, which could prove valuable given the increase in interest and corporation tax rates.
When will it apply?
Most provisions apply for periods commencing on or after 1 April 2023, however some apply to periods ending on or after 6 April 2020 and some are effective upon Royal Assent of Finance Bill 2023.
Changes to reference date relevant for capital disposals under an unconditional contract
Where a disposal takes place under an unconditional contract and there is a delay in conveying or transferring the asset, the Government will legislate to make changes to the time limits for notification of chargeability to tax and time limits for claiming losses.
The new legislation will affect any person who makes a chargeable gain or an allowable loss on the disposal of an asset under an unconditional contract, where that asset is conveyed or transferred over six months after the end of the tax year for the disposal, or, for companies, one year after the end of the accounting period.
It will alter the time limits for an individual or company to notify HMRC of their chargeability to capital gains tax or corporation tax. It also impacts time limits for any claims in respect of the disposal, such as allowable loss claims, and for HMRC to raise an assessment in relation to the disposal.
These deadlines will operate by reference to the year or accounting period during which the asset is conveyed, rather than the year in which the contract is made.
This is a technical amendment, aimed at closing a perceived tax avoidance route, where individuals or companies enter into unconditional contracts for the disposal of assets.
Where an individual or company makes a disposal, the legislation provides that the effective date of the transaction for CGT or corporation tax purposes is usually the date on which the contract becomes unconditional.
It is possible for the effective date of a transaction and, therefore, various deadlines for reporting, to be manipulated through the use of unconditional contracts that delay a completion date. The amendments aim to prevent this by setting an effective ‘back-stop’ date in these situations.
When will it apply?
Unconditional contracts entered into on or after 1 April 2023 for companies, and 6 April 2023 for individuals, trustees, and personal representatives.
Other business tax measures
The following is a summary of previously announced business tax measures that have been included in the documentation for this Budget, and one new measure.
As expected, the main rate of corporation tax will increase to 25% on taxable profits over £250k from 1 April 2023. A small profit rate of 19% will apply to taxable profits below £50k, with a marginal rate applied between these thresholds. The thresholds will be apportioned for short and long periods of account, and by the number of associated companies.
As a consequence of the tax rate change, the patent box legislation will be amended to ensure the correct preferential rate on patent box profits.
Large groups with global revenues exceeding €750m will pay a top-up tax where the effective tax rate is less than 15%. This will take effect for accounting periods beginning on or after 31 December 2023.
Large multinational enterprises will be required to prepare transfer pricing documentation, including a master and local file, in accordance with OECD guidelines for accounting periods beginning on or after 1 April 2023.
The Chancellor announced the opening of an 18-month election window, from June 2023, allowing shipping companies that have left the tonnage tax regime to return to the UK. Separate legislation will also allow third party ship management companies to join the regime, as well as increasing the limit on capital allowances to £200 million for lessors of ships coming into the regime, with effect from 1 April 2024.