After some better news on the economy, and the UK now predicted to narrowly avoid a recession in 2023, UK Chancellor Jeremy Hunt was able to focus on delivering the government’s growth plans. While it was hardly a giveaway budget, he is planning to spend more in the coming years than previously announced. So, will these new investments bear fruit and bring the UK economy back to the strong growth position required to balance the books in the longer term?
News for Business
The headline rate of corporation tax will rise from 19% to 25% from April 1 as planned and expected. The government confirmed the new multinational top-up tax (to meet OECD standards) on UK parent members within multinational groups for accounting periods beginning on or after Dec. 31. The new tax will implement the UK’s Pillar Two legislation to set a minimum global corporate tax rate of 15%.
However, some of the new measures were better news for businesses—none more so than the long-overdue commitment to a regime of capital allowances that recognizes the importance of business investment to the economy.
Business will be saying a fond farewell to the capital allowances “130% super-deduction” on March 31, but a happy hello to “full expensing” for capital spending until at least 2026. Companies liable to corporation tax are to benefit from a 100% first-year allowance for capital expenditure on qualifying plant and machinery. This represents a significant cash flow improvement for companies that will be able to write off certain types of capital expenditure in one year.
The first-year allowance of 50% will continue to be available for expenditure on new and unused special rate plant and machinery, including integral features in a building, and long-life assets. Smaller businesses still have the ability to claim 100% relief against such asset investments if their £1 million ($1.22 million) annual investment allowance is available to cover them.
Research and Development
A period of certainty for companies making capital investment decisions is most welcome, but uncertainty continues for businesses when it comes to R&D support. Reform of R&D tax reliefs has lasted for several years and is becoming an iterative process, with new changes taking effect from April and previously announced changes delayed until 2024.
Draft legislation to prevent companies from claiming R&D relief in the UK for project work undertaken overseas was released last year and was due to take effect for accounting periods beginning on or after April 1. This change has now been delayed until April 2024, when the government plans an even larger overhaul to the rules to combine both current R&D tax relief schemes into a single comprehensive regime. This delay is good news in the short term but may only be a deferral of the inevitable.
Changes to the rates of R&D relief (down for small and medium-sized enterprises but up for larger businesses) announced at the Autumn Statement 2022 are due to take effect from April. These meant that small loss-making companies, often biotech and tech start-ups, were expecting to see their effective rate of subsidy through the repayable R&D credit fall from 33.4% of costs to just 18.6%. The chancellor announced that such loss-making businesses with qualifying R&D expenditure of more than 40% of their total annual costs will be able to claim a repayable credit of 27% of their costs. Therefore, while these R&D-intensive businesses will still lose some funding support from April onward, the impact will be less than feared.
The government also has published its “quantum strategy” backed by plans to invest £2.5 billion over 10 years to help fund the development of quantum technologies in the UK. Alongside this, it will create an annual “Manchester prize” of £1 million for UK individuals or businesses making the most important advances in artificial intelligence, as well as investing £100 million in the Innovation Accelerators program for transformative R&D projects.
There was also good news for the UK creative sector, with increases in tax relief for film, TV, and video games businesses, and an extension of the existing post-Covid higher rates of tax relief for theaters, orchestras and museums.
Longer term positive news came from a range of expansions to state-funded support for childcare to get parents of young children back into the workplace. While this will take several years to implement, it should help to tackle the recently increasing numbers of “economically inactive” individuals in the UK and could potentially boost the UK’s low productivity to support growth.
Continuing the government’s leveling-up agenda, the chancellor committed to the delivery of 12 investment zones across the UK. These “knowledge-intensive growth clusters” are to be centered around universities and research institutes, with expectations of creating increased investment and growth in green industries, digital technologies, life sciences, creative industries, and advanced manufacturing.
Each investment zone will have a local investment package worth up to £80 million over a five-year period with various tax reliefs (following the current freeports model) and grant funding available to local businesses.
Bringing Inflation Down
Anti-inflationary measures, such as freezing fuel duty again and a continuing tough stance on public sector pay, hopefully will help reduce domestic inflation rapidly, although yet higher interest rates also may be needed for the predicted sharp fall in inflation to materialize.
In his autumn statement, Hunt took sensible steps to steady the ship and bring some much-needed stability to UK financial policy—it had a big impact at the time and, overall, his announcements were well regarded, if not universally popular.
Given his lack of financial headroom to maneuver, the chancellor has delivered some sensible policy announcements that eventually will be positive for the UK economy. But against a background of high business tax rates and inflation, I wouldn’t expect this budget to significantly move the dial on UK economic growth: Hunt must be hoping that growth in the world economy comes to his aid.
Businesses and their advisers would now like to see a clear direction in UK tax strategy; one that enables them to plan for future events with at least some degree of certainty. If this is to be higher headline tax rates with accelerated reliefs and more targeted innovation incentives, then so be it. What very few businesses want are repeated changes in direction that only add to increased costs and uncertainty.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Paul Falvey is a tax partner with BDO.
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