Spring Budget 2023: Entrepreneurs and business owners
Chancellor Jeremy Hunt set out his approach in the Budget to tackling growth and the economy as the ‘four Es’ (enterprise, education, employment and everywhere).
Through the lens of the UK entrepreneurial and business community, however, the more relevant theme seemed to be ‘PPE’. Not ‘personal protective equipment’, although the post-covid ripples are still keenly felt, but rather an older usage of the acronym - Politics, Philosophy and Economics, which the Chancellor studied at Oxford.
There was plenty of the politics you would expect from a Budget that is 18 months from a general election, with pledges to maximise the opportunities offered by Brexit to support British businesses, introduce further investment zones and usual continued pledges to clamp down on tax avoidance. Many will be disappointed by the lack of support for an underfunded HMRC, however, which was not able to answer its hotline in January and which is taking a record number of months to process basic but important services such as VAT registration forms.
The headline change was more generous child-care provision to encourage parents to return to work and boost the supply of workers to businesses. It will be phased in over time, so it will not have an immediate effect. As a policy promoted by Labour, it seems likely however to have cross party support and hence a longer-term impact.
By contrast, the changes to pensions are making the biggest headlines and are more politically controversial. The pension lifetime allowance, currently just over £1million, is to be abolished, coupled with an above inflation increase in the annual allowance, which governs the amount people can pay into their pensions each year, from £40,000 to £60,000. The stated aim is to retain experienced workers in key fields, especially the NHS, for longer. The benefits will, however, be limited for those individuals whose taxable income exceeds £260,000 or those entrepreneurs whose income fluctuates from year to year. The changes could present opportunities for business owners if they are convinced that the changes will remain in place long-term. Those looking to extract surplus cash from their company in a tax-efficient manner, either in preparation for a sale/liquidation or on an ongoing basis, could take the opportunity for a larger company contribution to top-up their pensions. Funds can pass into the pension free of tax, while benefiting from tax-free growth inside the pension and receiving protection from inheritance tax on death.
There were several announcements in pursuit of longer-term strategic goals.
Key industries targeted
To support attempts to achieve the UK’s climate goals, there were measures to promote green industries, including expanded use of existing and new nuclear technologies “Great British Nuclear” and developing carbon capture, usage and storage.
Hopes to achieve sustainable longer-term growth are pinned on other digital technology sectors, including special proposals for AI and quantum computing, alongside life sciences, advanced manufacturing, and creative industries. Support for these industries takes the form of direct funding pledges, combined with the extension of the British Patient Capital programme for a further decade and steps that will be taken to unlock investment from particular UK pension schemes.
Properties and property businesses
What was disappointing, however, was the lack of attention given to the woeful state of British property stock, which is among the oldest in Europe and possibly the world.
There are proposals for most residential properties to have a minimum ‘C’ rating for Energy Performance Certificates, by 2025 for new tenancies, and 2028 for all other tenancies. For most commercial properties a minimum ‘E’ rating is required by April 2023, with proposals for a minimum ‘C’ rating by 2027 and ‘B’ rating by 2030. The Office of Tax Simplification’s penultimate report in November 2022 outlined practical, long-term policy ‘wins’ that would incentivise both business owners and landlords to spend money to meet these environmental objectives by clarifying and enhancing the tax regime to relieve a broader range of expenditure.
There were slightly better than expected January 2023 tax receipts, a forecast that inflation will fall to 2.9% before the end of the year, and a hope that interest rates will peak soon. Uncertainties remain, however, as the ongoing market reaction to Silicon Valley Bank has shown.
Autumn Statement 2022 tax rises not reversed
The last five years have been turbulent for the UK in addressing post-Brexit trading relationships, COVID-19, and monetary tightening. The UK’s current account is in the red and the UK’s growth forecast over the medium term has worsened since Autumn 2022. Added to this, the Government's economic reputation was badly bruised by the short-lived Truss / Kwarteng era and so the Chancellor’s focus has been on rebalancing the books over the longer term.
Most tax revenue comes from income tax/national insurance (46%), VAT (20%) and corporation tax (8%), and so the economic calculation has been to pull these main revenue raising levers.
Hence the not unexpected news from the 2023 Spring Budget that the Chancellor is not rowing back on the key announcements made at the 2022 Autumn Statement, including:
- The increase to corporation tax from 19% to 25%
- The 45% income tax rate will start on incomes above £125,140 rather than £150,000
- Personal income tax allowances and VAT thresholds to be frozen
- Capital gains allowances will be roughly halved to £6,000 for the 2023/24 tax year and will halve again the year after
- The inheritance tax nil rate band, £325,000 since 2009, remains frozen
The effect of double-digit inflation has exacerbated this ‘fiscal drag’ effect to effectively increase real tax rates further.
Help for businesses now
There is an extension of sorts to the 100% first-year allowance ‘super deduction’ for a further three-years until 31 March 2026, together with more generous research & development tax relief for both small and large companies and has been estimated at £9bn.
The fuel duty cut will provide a small but broad measure of support to workers and businesses. The hospitality sector has been badly hit and will take any help it can get, even an 11p drop in duty on draught beers sold in pubs.
There were less detailed promises to help the regional economy with twelve new enterprise zones across the UK.
No news for businesses
There were no changes to the headline rates of capital gains tax or restrictions to the availability of business asset disposal relief (BADR). With a headline CGT rate at an almost historic low of 20% this could be considered welcome news. However:
- Since 2008 individuals and unincorporated businesses have had no relief on the inflationary element of their capital gains
- Entrepreneurs suffer capital gains tax on a sale of their business and the main targeted relief, BADR, is now a relatively meagre £1m on lifetime gains. A more progressive relief regime would help reinvestment of such risk capital back into new businesses.
There are some specific policies targeted at particular sectors and some nascent longer term plans. The broader changes to pensions and capital allowances go some way to offset the increased tax take announced in Autumn 2022.
The UK has 5.5m business owners, who are responsible for 48% of the UK’s employment. A Government with a serious growth agenda could be doing more to incentivise this vital entrepreneurial landscape, to help encourage businesses to start, grow, and exit. With a general election looming, there is however uncertainty about how long these proposed tax policies might last.
Reforming pension tax thresholds
The pension lifetime allowance charge will be removed, before it is fully abolished in a future Finance Bill. Alongside this major change, increases in the annual allowance, the money purchase allowance, the minimum tapered allowance, and the minimum tapered allowance income threshold were also announced.
The lifetime allowance is the maximum amount that can be held in a pension before it is subject to an additional tax charge. Currently, the allowance is £1,073,100. From 6 April 2023, the lifetime allowance charge will stop being levied and from April 2024 the lifetime allowance itself will no longer exist. This means that an individual is no longer restricted on the total amount that can be held in the pension fund.
Despite the lifetime allowance being removed, there will still be a restriction on the total amount of tax-free cash that can be taken from a pension. This will be limited to 25% of the current lifetime allowance, which equates to £268,275. That said, anyone with any form of lifetime allowance protection will still be entitled to a higher level of tax-free cash. It is not yet clear whether or not making future pension contributions will result in this protection being lost.
The annual allowance for pension contributions will also increase from the current level of £40,000 to £60,000, and the ability to carry forward unused allowances for three tax years will remain in place.
Annual allowance tapering will also remain but the threshold after which the annual allowance will be reduced will increase from £240,000 to £260,000. The minimum annual allowance after tapering will increase from £4,000 to £10,000.
Finally, the money purchase annual allowance will increase from £4,000 to £10,000. The money purchase annual allowance may apply if an individual has already started to draw an income from their pension.
Following many years of restrictions being applied to pension savings, this is certainly welcome news. Relaxation of allowances was expected, with specific reference made to NHS doctors, where reports suggested 80% were being caught by the lifetime allowance charge when retiring.
The announcement however takes this further than anticipated with the abolition of the lifetime allowance.
As the Chancellor pointed out, this will not only benefit NHS doctors but also many other pension savers who were reluctant to continue saving into their pension for fear of breaching the lifetime allowance.
As pension funds usually fall outside the scope of IHT, this abolition has the added advantage for taxpayers of providing additional shelter from IHT.
While the lifetime allowance means there is no restriction on the size of a pension pot when taking benefits, tax-free cash will still be limited to 25% of the 2022/23 lifetime allowance.
Additionally, the annual allowance restriction and tapering rules still remain in place, which will limit a high earner’s ability to save into their pension.
Overall, however, a positive set of announcements for those looking to save for the future via a pension.
When will it apply?
From 6 April 2023.
Freezes to allowances and limits
The ISA annual subscription limit will remain at £20,000 for the 2023/24 tax year. The limits for child trust fund and junior ISA subscriptions also remain unchanged at £9,000 per tax year.
The amount that an individual can contribute to their ISA in the 2023/24 tax year will remain unchanged for the seventh consecutive tax year. It is a similar story for junior ISA limits, which have been frozen since 6 April 2020.
Confirmation of the main rates and allowances will be included in the Spring Finance Bill 2023, which will be published on 23 March. It was previously announced that the personal allowance and higher rate threshold will remain at the current levels, £12,570 and £50,270 respectively, until 5 April 2028.
At a time where inflation is impacting on the cost of living, freezes in rates and allowances bring a ‘stealth tax’ that impacts the lowest earners.
At the same time, those wanting to invest for the future over a sustained period in a tax-efficient environment see their capacity to do so restricted for another year.
When will it apply?
From 6 April 2023
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.
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.
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.
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.