The Budget contained a number of exciting announcements for fintech businesses, including increased research and development (R&D) tax credits, and reliefs in new investment zones. The changes may however not go far enough to encourage growth at the rates hoped for.
The Chancellor headlined his Spring Budget of 2023 as the “budget of growth” and committed to launch the UK as a “science and technology superpower”. A number of announcements were made affecting UK fintech and fast growth tech businesses. These include amendments to R&D relief, highlighting a plan to attract new investment in fast-growth companies, the replacement of the super-deduction, as well as the establishment of new investment zones throughout the UK. There were also welcome announcements on commitment to ensure the UK remains one of the top three countries for quantum investment through a dedicated AI research resource and a £2.5bn innovation program for quantum computers.
As expected, the Chancellor restated the commitment made in Spring Budget 2021 for the headline rate of corporation tax to increase from 19% to 25% from 1 April 2023 for large businesses with profits over £250,000. It will not come as a surprise that the Government has persisted with this policy despite the calls from many business leaders with the cost of Government borrowing increasing in the wake of rising interest rates.
Perhaps the most significant announcement impacting the fintech sector, as well as the tech sector more generally, was the much-anticipated update on reliefs for R&D. A significant announcement was made to defer the date on the previously announced restriction on overseas expenditure by a year from 1 April 2023 to 1 April 2024. While the Government’s move to defer this reform will be welcomed in the sector as a temporary measure, it does not seem to go far enough towards forming a sustainable and competitive tax regime, particularly for fintech and fast-growth businesses that often rely on overseas expertise in light of local skills shortages. For context, as of January 2023 there were 68,000 unfilled vacancies in the software industry. The mere deferment of the reform seems to be more of a symptomatic cure, as opposed to a long-term measure to incentivise STEM skills growth in the UK.
The Chancellor also announced that R&D intensive loss making companies with expenditure on related activities over 40% of total spend 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 and go some way to balance the change for R&D intensive firms following the reduction in benefit under the current scheme for small to medium enterprises (SMEs). For many fintech companies it is however unlikely that they will fall within the scope of this new relief or, if they do, the administrative burden of testing the 40% limit will be quite cumbersome. 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. This is however a measured response from the Government in the backdrop of significant abuse from SMEs under the previous scheme. Further commentary in relation to reforms of R&D tax reliefs can be found below.
The Chancellor deferred a key issue until his statement in the Autumn, noting that he would come back with a plan to bring the benefits of investment in high-growth firms to more investors. This included the potential of unlocking defined contribution pension fund investment, as well as making it more advantageous to list on the London Stock Exchange. This issue is at the forefront of the minds of many SMEs and scale-up businesses in the fintech sector in the wake of the rescue of Silicon Valley Investment Bank (SVIB). If the Chancellor succeeds with these promises it will be hugely positive for established UK fintech businesses to generate investment, however it does not address early-stage investment, notably with changes discussed to the seed enterprise investment scheme and enterprise investment scheme in the mini-budget of 2022 absent from the statement. The move to support the tech businesses in responding rapidly to rescue SVIB was perhaps the most significant action which was taken by the Chancellor this week for the sector.
An announcement was made on the replacement of the super deduction scheme that is due to come to an end on 31 March 2023. A new scheme will be introduced that will allow businesses to deduct all capital spend in full in relation to IT equipment and plant and machinery against taxable profits in the first year. The scheme has initially been committed to run for the next 3 years, with a view to make this a permanent allowance in the future. This will be welcome news for SMEs and scale-up businesses allowing them to continue to invest in capital expansion while benefitting from a tax deduction. The Government will also hope this added incentive encourages business to spend in the UK promoting growth more generally across the economy.
A commitment was made to the establishment of 12 investment zones” across the UK as a continuation of the Governments levelling up plan. The investment zones will be able to access an offer similar to that of the freeports scheme with enhanced capital allowances, as well as relief from SDLT, business rates and NIC. To access this scheme local partners will need to provide backing for how the innovation will be delivered, and how they plan to involve local universities, councils, and businesses. This will go some way to address the recommendation of the Kalifa Review in 2021 on scaling and supporting regional specialisms to maintain the UK’s position as a fintech hub. We will have to wait and see the effectiveness of this new scheme as previous schemes have had limited success.
This Budget set out to deliver growth to a recovering economy by putting science and technology at the heart of its plan. Many in the fintech and fast growth tech sector will however be forgiven for feeling slightly underwhelmed by the announcements made today in the Chancellor’s speech. We hope that the Autumn statement will deliver change that supports the growth of SME’s operating in the fintech sector both in London and nationally.
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.
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.
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.