The indications are that the UK will narrowly avoid a technical recession in 2023. The Chancellor announced that the Office for Budget Responsibility has forecast that inflation is expected to reduce significantly from the current rate of 10.1% down to 2.9% by the end of 2023. Given the recent uncertainty, inbound businesses will welcome the stability and support shown by the Chancellor, in particular following the recent bank rescues. We will be looking for the Autumn statement to demonstrate additional support for inbound business and incentivise investment into the UK.
The Budget contained a number of positive announcements for inbound businesses, in particular for fast growth businesses and those in the technology sector, including increased research & development (R&D) credits and reliefs for businesses in new ‘investment zones’.
Inbound businesses will already have prepared for the increase to the main rate of corporation tax, which the Chancellor maintained as part of his announcements. The main rate of corporation tax increased from 19% to 25% from 1 April 2023 for large businesses with profits over £250,000. There is a small profits rate of 19% for profits up to £50,000. Where a company's profits fall between the lower and upper limits, it will pay tax at the main rate of 25% but be entitled to marginal relief. The Chancellor underlined that the UK will still have the lowest headline corporation tax rate in the G7.
To offset both the tax rate rise and the end of the super deduction, the Chancellor announced 100% capital allowances tax relief through full expensing, effective from 1 April 2023. The super deduction scheme ended on 31 March 2023 and will be replaced by this new scheme allowing 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 will initially run until 31 March 2026, with a view to being a permanent allowance in the future. This will be welcome news for businesses, allowing them to continue to invest while benefitting from a tax deduction and gives the UK one of the most generous schemes in the world. Full expensing of eligible capital expenditure provides an upfront corporation tax saving (25p for every £1 invested), as well as a reduced administrative burden as the deduction does not need to be tracked over several years. The 50% first-year allowance for expenditure on new special rate and long-life assets has also been extended. The Government will hope this added incentive encourages businesses to spend in the UK, promoting growth across the economy.
The UK remains an attractive proposition for undertaking R&D activities, given the availability of skilled workers and generous R&D reliefs available, particularly for smaller businesses. The Chancellor announced that R&D intensive loss making SMEs with qualifying expenditure on R&D activities comprising over 40% of total expenditure will qualify for a higher tax credit of 14.5% to incentivise innovation. This will give qualifying loss-making companies a cash credit worth £27 for every £100 spent and helps to balance the change for R&D intensive firms following the reduction in benefit under the current scheme for SMEs. Nevertheless, critics have questioned how many businesses will practically be able to fall within the 40% threshold and noted the administrative burden of complying with this.
The Government also previously announced restrictions on the inclusion of overseas expenditure within R&D claims, but these measures have been delayed by a year, and will come into effect from 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 fast-growth businesses that often rely on overseas expertise in light of local skills shortages. 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.
On transfer pricing, the Government confirmed that legislation will be introduced to require large multinational businesses operating in the UK to maintain a master file and a local file in a prescribed format, per the OECD’s transfer pricing guidelines, alongside a summary audit trail. Pillar two legislation in the form of the UK’s multinational top-up tax and the domestic top-up tax will be enacted as planned and will come into effect for accounting periods beginning on or after 31 December 2023.
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. The investment zones will benefit from preferential fiscal tax incentives available over a 5-year period as well as planning benefits and wider Government support, to boost development and growth. Inbound businesses should give consideration to their choice of UK location and the incentives on offer.
The Budget also highlighted the ongoing review of the UK business rates system and the Government’s commitment to consult and re-shape policy, which would be relevant for inbound businesses looking to occupy commercial UK property. Two new consultations are launched while we await publication of responses to two recently closed consultations.
The Government acknowledged the creative industries as a sector of strategic importance and hence certain creative industry reliefs will be reformed and extended to encourage investment and support the industry.
On the personal tax side, whilst there are no major changes to UK income tax, capital gains tax or inheritance tax, significant reforms were announced in relation to UK pensions.
As expected by many, this Budget was a forward looking one focussing on the tax benefit of future investment in the UK. The key takeaway for the international community is, given the rise in the corporation tax rate this year, is the current investment strategy in the UK fit for purpose or is there a better way to invest in the UK to benefit from all of the generous incentives and reliefs on offer? Our experienced tax team at Evelyn Partners can help you answer that question.
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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.