The Budget focussed on delivering improvements in energy security with associated Net Zero benefits, whilst delivering growth and striving to protect consumers from elevated costs. Many other Net Zero recommendations made in the Mission Zero report published in January were not acted on.
Nuclear energy is a controllable low carbon energy source, representing a vital plank in the Government’s energy security strategy. Investment in nuclear energy received a significant boost with announcements that there will be a consultation on classifying it as sustainable energy, meaning that it will be able to access the same investment incentives as renewable energy. Great British Nuclear will also be seeking to drive down costs of new nuclear energy and secure 25% of electricity supply from nuclear by 2050. A competition of small modular reactors will run to the end of 2023 and the Government will co-fund development if the technology is proven viable.
Carbon capture and underground storage has been in development for a long time without any successful projects to date. The Chancellor announced £20 billion support for early development projects, supporting up to 50,000 jobs and capturing 20 to 30 million tonnes of carbon a year. A shortlist of projects will be announced later this month with further clusters and expansion to be announced later.
12 new investment zones were announced, benefitting from funding and tax incentives over a 5-year period to boost development and growth. The zones are likely to be close to universities and research institutes and are intended to drive growth in green industries and advanced manufacturing to drive the transition towards Net Zero as well as three other key sectors: life sciences, creative industries, and digital technology. All investment zone proposals will also be required to show how they support environmental targets and the UK’s commitment to meet Net Zero by 2050.
The Mission Zero review suggested that there should be a major review of R&D incentives by the Autumn focussing on how to incentivise greater R&D for Net Zero delivery, particularly by further clarifying research priorities, reviewing Government support through tax credits and increased ring-fencing of R&D spending. R&D tax relief was subject to change in the Budget but there has been no commitment to review the relief in the context of Net Zero ambitions.
Agricultural policy and spending is also being reformed, with farmers and land managers to be paid for providing environmental goods and services alongside food production. Frameworks are also being put in place to support increased private investment in the natural environment, leading to new ecosystem service markets in biodiversity net gain, peat and woodland credits and nutrient pollution offsetting. The tax treatment of these new markets is complex, but it is essential that the tax impacts are implemented in a way that is clear, certain, and promotes adoption of the schemes. A consultation and call for evidence has been launched with a closing date of 9 June 2023.
Climate change agreements provide energy intensive businesses with climate change levy discounts on their energy bills of 92% for electricity and 88% for gas. Climate change agreements are to be extended for eligible businesses by a further 2 years to 31 March 2027, and they have been reopened to new entrants. Consultation on a future replacement of the scheme is also to take place, although there has been no commitment to a future scheme at this point. Those affected have until 10 May 2023 to respond to the consultation.
In the Mission Zero review of the Government’s progress towards Net Zero, the zero rate of VAT for energy saving materials was highlighted as a successful policy and it was recommended that the zero rate of VAT should be maintained permanently. There are issues with the operation of the zero rate for energy saving materials that need to be addressed, including the impact of the mixed supply rules that prevent the zero rate from being applied in many circumstances. The Government launched a call for evidence to consider both extending the scheme to charitable purposes, and including additional technologies, which closes on 31 May 2023.
Two other VAT related recommendations in the Mission Zero review were for VAT to be balanced for public and private charging of electric vehicles (EVs) at 5% and for VAT on product repairs to be zero rated to stimulate the circular economy and reduce consumption. Currently there is an imbalance which means that those who cannot charge EVs at home pay 20% VAT on public charging. Neither of these measures were considered in the Budget.
The Mission Zero review also called for the Government to review the effectiveness of tax policy to incentivise investment in decarbonisation, including through capital allowances. In the Budget the Government announced a new blanket model of full expensing from 1 April 2023 which will allow companies to claim 100% capital expenditure on qualifying main rate plant and machinery and the 50% first year allowance for special rate and long-life assets has been extended. This is a significant investment relief welcomed by companies but may be a missed opportunity to align the capital allowances regime better with Net Zero.
Business rates were also the subject of the Mission Zero review, with a recommendation that the Government should assess business rates incentives to ensure that there are no further inadvertent disincentives for business to invest in Net Zero. In our view, the short term nature of the existing business rates reliefs for renewable energy and battery storage encourage only short term investment. Whilst business rates is firmly on the agenda in the Budget and there are two new consultations, there is no review of how business rates could be used to further promote investment in Net Zero.
Carbon leakage occurs when energy intensive industries relocate to territories with lower regulation, resulting in higher overall carbon emissions. The Mission Zero review recommended that a consultation on mitigating measures should take place with a view to implementing effective policies from 2026. The UK Government is already facing pressure from Parliament to act on this issue, particularly given the imminent introduction of an EU carbon border adjustment mechanism (CBAM) that would at first require reporting of emissions generated from the production of energy intensive products, for example steel, for imports into the EU from countries deemed to have lower taxes on carbon emissions. The UK Government promised Parliament in May last year that it would launch a consultation on a UK CBAM. It was notably absent from the Budget yesterday, together with the suggested pathway for the UK Emissions Trading Scheme to 2040, further delaying any action to address carbon leakage risks and not addressing two key measures that are necessary components of the plan to reach Net Zero.
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.
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.
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.
VAT relief for the installation of energy saving materials
The Government has announced a call for evidence on options to reform VAT relief for the installation of energy-saving materials
The call for evidence will consider an extension of the VAT reliefs for energy-saving materials, to include where they are installed in buildings used for a relevant charitable purpose. Since 2013, the relief has only applied to installations of qualifying materials in residential property. The review will also consider including within the reliefs additional technologies such as battery storage.
Any extension to the VAT relief and inclusion of new technologies will be welcomed by homeowners and charities. It is hoped that the review will be ambitious and result in a much broader relief that will help drive energy efficiency and reduce carbon emissions.
When will it apply?
The call for evidence closes on 31 May 2023.
Carbon Capture, Usage and Storage
The tax consequences of payments into decommissioning funds made by oil and gas companies to repurpose assets for use in Carbon Capture, Usage and Storage (CCUS) will be legislated for at a future date. This will follow Royal Assent of the Energy Bill
Some oil and gas assets can be repurposed for use in CCUS projects more efficiently than developing new CCUS projects. Oil and gas companies make payments into decommissioning funds for assets which are within the oil and gas corporate tax ring-fence.
The Government will consult on the tax consequences of payments into decommissioning funds where they relate to the repurposing of ring-fence assets for use in CCUS.
Any changes will take effect in the future, after Royal Assent of the Energy Bill, which is currently at the report stage in the House of Lords.
The Budget today was highly focused on green industries and the transition to Net Zero to support growth and energy security.
This measure is coupled with the announcement of £20 billion funding for CCUS projects, with the Government aiming to support 50,000 jobs and capturing 20-30 million tonnes of CO2 per year by 2030.
When will it apply?
Future date, to be determined.
Increase in late payment penalties for plastic packaging tax
Late payment penalties for plastic packaging tax are being amended so that assessments and late payments of returns are treated in the same way. The penalties for late payments of returns will be 5% for periods beginning on or after 1 April 2023.
Under the current rules on late payments of returns, the first late payment starts a 12-month penalty period. Subsequent late payments within the penalty period incur penalties of 2% for the first default, 3% for the second default and 4% for the third and subsequent defaults.
The Budget announcement increases the penalties, such that late payments of returns for return periods beginning on or after 1 April 2023 will always incur a 5% penalty.
An increase in the penalty for late payment of plastic packaging tax will have a significant impact on many businesses that are still trying to overcome the administrative complexities of preparing and filing plastic packaging tax returns.
HMRC’s tax receipt statistics show that there are significant late payments being made for plastic packaging tax. In theory, HMRC should only receive plastic packaging tax payments in July, October, January and April. The tax receipt statistics show significant receipts for every month from July 2022 onwards.
When will it apply?
From 1 April 2023.
Climate Change Levy rate increase
The main rates of Climate Change Levy for gas and solid fuels are to be increased. The gas rate will also be aligned with the electricity rate, and the solid fuels rate will increase proportionally to the gas rate.
The Climate Change Levy main rates announced in the Budget were:
|1 April 2023
|1 April 2024
|Electricity (£/kilowatt hour)
|Gas supplied by a gas utility (£/kilowatt hour)
|Petroleum gas, or other gaseous hydrocarbon (£/kg)
|Any other taxable commodity (£/kg)
This change in rates is consistent with the Government’s objective to close the gap between the tax rates for gas and electricity to better reflect the carbon emissions associated with their use.
When will it apply?
From 1 April 2023.
Climate Change Agreements extended for energy intensive businesses
Climate Change Agreements (CCAs) have been extended by two years to 31 March 2027 and reopened to new entrants. This will mean businesses in energy-intensive industries with a CCA will pay reduced climate change levy rates for two more years, provided the sector as a whole meets agreed energy efficiency targets.
CCAs provide energy-intensive businesses with discounts on the climate change levy charged on their energy bills in return for meeting energy efficiency targets. The reduced amounts relative to the main rate are as follows:
|1 April 2023
|1 April 2024
|Any petroleum gas
|Any other taxable commodity
CCAs have been closed to new entrants and were due to end on 31 March 2025. In the Budget the Government has reopened the scheme to new entrants and extended it for two years to 31 March 2027.
A consultation on a replacement scheme has also been launched today, closing on 10 May 2023.
CCAs are a key element of the Government’s support for energy-intensive businesses. The energy efficiency requirements help reduce emissions and drive progress towards net zero.
The CCAs are available for sectors with high energy use which are subject to international competition and provide valuable cost savings to eligible businesses.
The consultation document outlines some reforms that could be taken forward as part of a future scheme but notes that no decisions have been made on whether a future scheme will be pursued.
Failure to address the risk of international competition could result in energy-intensive businesses becoming uncompetitive and/or relocating to other territories with lower emissions regulation, leading to higher carbon emissions, a phenomenon referred to as carbon leakage.
Affected businesses will be keen to understand the future position beyond 31 March 2027. If CCAs are not continued, alternative measures, such as a carbon border adjustment mechanism, which address the risk of cheaper imports from territories with lower emissions regulation (leading to higher emissions) will be needed.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.