The Chancellor is likely to attempt to mitigate any perception that the UK is a less attractive option for international businesses, following the increase in the main rate of corporation tax from April and the reduction in the rates of R&D relief for SMEs. A roadmap to set out future tax cuts could move us towards this goal.
It would be surprising if energy and Net Zero do not feature heavily in the Budget. One of the key recommendations from the recent Mission Zero publication is the need for long-term certainty to encourage business investment, further supporting the need for advanced warning of tax changes to allow sufficient time for businesses to plan and budget.
Any future plans to reduce the rate of corporation tax must be carefully balanced with the Government’s cashflow needs. Any decrease in the short term would likely mean spending cuts or tax rises elsewhere to fund the difference.
Incentivising business growth
Incentivising business growth is likely to be a key area of focus, given the extended period of economic turbulence. Improving incentives for business expenditure, such as through changes to the R&D and capital allowances regimes, is likely, but we may have to wait longer for some of this. Also likely is the removal of the sunset clause for the Enterprise Investment Scheme and Seed Enterprise Investment Scheme, firming up on the Government’s stated support for these schemes. Without this change, the tax incentives available for investment will fall away in April 2025, limiting the ability of many small businesses to raise finance.
Changes to the R&D regimes are expected to be introduced from 1 April 2023. Given the robust responses to some of the proposed changes, it would not be a surprise to see some of the proposed changes delayed to allow time for responses to be properly considered. Many of the concerns raised related to the proposed restrictions to claims involving overseas expenditure and the requirement for advance notification. We hope that a transition period or phased introduction of these changes will be announced to prevent a cliff edge outcome and allow businesses to plan appropriately, reducing the impact on the cost and viability of plans already in place.
The response to the ongoing consultation on a single scheme for R&D is also expected. The Budget may confirm its intention to combine the RDEC and SME schemes, creating a single above the line credit, a proposal which has gained support provided it is implemented in a way that achieves simplification for the taxpayer and produces a fair outcome for businesses of different sizes.
The CBI and Mission Zero review expressed concerns that the UK is falling behind international competitors in the race to provide the goods and services needed to deliver Net Zero. This may lead to new tax incentives. We also wait to hear what will replace the 130% super deduction. Suggestions around linking the availability of enhanced capital allowances to a reduction in the energy use of a building or the business’ carbon footprint would provide a more targeted incentive. If a full response to the capital allowances consultation is not available by 15 March, a temporary extension to the super deduction regime may be announced.
Increasing the likelihood of achieving Net Zero
We expect the Government’s response to the tax recommendations within the Mission Zero review . This could include a wider review of how HMT incentivises investment in decarbonisation, including through changes to the tax system.
We have analysed the impact of the Mission Zero report for tax here. Some specific changes that have been suggested include:
- The equalisation of VAT on public (20%) and private (5%) electric vehicle charging in 2024. We would welcome VAT equalisation to 5% as it would further incentivise the transition to electric car use.
- The EU's Carbon Border Adjustment Mechanism (CBAM) will enter into force from 1 October 2023. The CBAM is a mechanism for putting a price on the carbon emitted during the production of carbon intensive goods entering the EU. As the EU measure progresses, the UK risks distortion of international trade if it does not adopt a similar mechanism. The Mission Zero report notes that encouraging UK industry to decarbonise without applying similar standards and costs to imported materials and goods will make the UK uncompetitive. We expect a UK CBAM consultation to be announced at the Budget.
- A review of plastic packaging tax may be announced, and would be in line with recommendations from the Environmental Audit Committee. Suggestions to go further, including by introducing an escalator on the rate of the tax and the recycled content threshold, may be considered. We hope that any review would address administrative issues and assess the cost of compliance compared to the amount of tax collected.
In some areas, financial considerations are likely to outweigh the best environmental outcome. With households and businesses under financial pressure and the Government under pressure to cut inflation, it is likely that the temporary 5p cut in fuel duty will be extended temporarily. Similarly, removing the 2021 cut in air passenger duty for domestic flights, to send clear price signals to consumers of the high emissions cost of flying, is unlikely to happen at this Budget.
Attracting businesses to the UK
The Chancellor has announced that he wants to create “investment zones, mini Canary Wharfs, supporting each one of our growth industries, and each one focussed in high potential but underperforming areas”. The first steps towards this aim are likely to be announced, together with more information on how tax incentives will support these.
Introducing anti-avoidance measures
There are almost always new anti-avoidance measures announced at a Budget. From a political perspective, focussing on closing the UK’s estimated £32bn tax gap is an obvious way to increase revenue.
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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.