Bloomberg Tax
March 20, 2023, 7:00 AM

UK Spring Budget 2023—A Case of Too Little, Too Late?

Jane Mackay
Jane Mackay

Chancellor Jeremy Hunt’s Spring Budget, which he delivered on March 15, was scattered with references to former Conservative chancellors and to “that note”, left for the incoming coalition government’s economic team in 2010, which said: “there’s no money left.” These references may have been an attempt to persuade voters that the economy is in safer hands with the Conservatives. However, whether or not this speech was the starting gun for an election campaign, it was an inadequate response to the enormous economic challenges the UK faces.

Getting Britain Working

The complete abolition of the lifetime pension allowance from April 6, 2023, was the only surprise of the day, given that speculation had been focused on raising the limit to £1,800,000 ($2,185,553) from the previous lifetime allowance of £1,073,100. The change grabbed headlines but the underlying detail is complex and incomplete.

Increasing the annual pension allowance from £40,000 to £60,000, and the tapered allowance restriction (for high earners) earning in excess of £360,000 from £4,000 to £10,000, were specific measures to discourage senior doctors and general practitioners from taking early retirement and was part of a package to encourage the over 50s back into work. The Office for Budget Responsibility estimates that 15,000 people will rejoin the workforce as a result, but it seems hard to believe that so many would decide to stay working purely because of these pension changes.

At first glance, removing the lifetime allowance seems like an opportunity to boost inheritance tax free pension savings. However, with the Labour Party already announcing that they would reinstate the lifetime allowance, anyone with “fixed protection” (which maintains a lifetime allowance at a certain level) will need to think carefully before revoking it to top up their pension pot. For other working high earners, the opportunities to put more in their pensions are still limited by the amounts of the annual allowances.

A Science Superpower

Further changes to UK Research and Development tax relief adds to the ongoing uncertainty and complexity for taxpayers. Possibly in response to the dismay at proposals in the 2022 Autumn Statement to restrict relief for small and medium sized enterprises, from April 1, 2023 loss-making R&D intensive SMEs can claim £27 for every £100 of R&D investment. An R&D intensive SME must spend at least 40% of its total costs on qualifying R&D.

While this sounds like a better deal than is currently available to non-R&D intensive companies, a technical note issued by HM Revenue & Customs confirms that a loss-making SME’s eligibility for an R&D tax relief, that takes effect from April 1, 2023, will be determined by yet-to-be-published legislation that will only become law in the summer of 2024 and be claimed on a digital form that isn’t available yet. The technical note almost apologetically says that “once legislation is in place, companies will be able to claim relief, including by amending an earlier claim relating to expenditure from 1 April 2023”.

Whether this was a rushed last-minute idea, or it just got caught up with all the other elements of R&D tax relief under consultation, is hardly relevant. What’s important is that the new measure doesn’t give the certainty that business has requested and doesn’t make it easy for cash-strapped R&D intensive businesses to claim the cash they need to grow.

Incentivizing Investment

To soften the impact on businesses of the hike in corporation tax to 25%, the chancellor announced changes to the capital allowance rules. From April 1, 2023, full expensing will replace the super-deduction which comes to an end on March 31.

Full expensing will be available initially for three years and will allow qualifying companies (but not unincorporated businesses) to write off the full cost of qualifying plant and machinery in the first year via a 100% allowance with no financial limit. Companies investing in special rate (including long life) assets will continue to benefit from a 50% first-year allowance in the year of investment.

On the face of it, the new full expensing rules look like a much more generous relief for businesses. However, given that the annual investment allowance already provided businesses with relief of up to £1 million of expenditure, it appears the full expensing rules will benefit only a small proportion of the largest companies that spend more than £1 million on plant and machinery and are likely to pay corporation tax at the full 25% rate.

Overall, though, the measure should encourage companies to bring forward substantial investment that can drive growth. It is also appealing because it delivers tax simplification.

We might learn more about plans for tax simplification on March 23 because the chair of the Treasury Select Committee, Harriet Baldwin MP, has asked Mr Hunt to explain why he is closing the Office of Tax Simplification. Presumably not because he thinks the UK tax system is now sufficiently simplified? Extensive tax reform and simplification could be one way of driving the changes needed to deliver a greener, more productive UK economy, but there’s unlikely to be the political support for that before the next election.

Brexit Freedoms

There was surely more Mr Hunt could have done to take advantage of our Brexit freedoms to attract investment. Bankers’ bonuses will, of course, continue to be a political hot potato when many are facing a cost-of-living crisis, but income tax revenues from around 5,000 highly paid bankers could have largely funded the increases announced to the defense budget of £5 billion. Instead, the UK has lost out on substantial tax revenues as banks continue to shift teams from London to other European centers as a result of Brexit.

For cultural tax reliefs, eligibility will require from April 1, 2024 a percentage of expenditure in the “UK” rather than (as is currently the case) expenditure in the “UK or EEA”. This will mean that theater productions or exhibitions touring the European Economic Area will most likely enjoy lower tax reliefs.

Looking on the bright side, one Brexit measure will mean that draft beer served in a pub will be 11 pence cheaper than in supermarkets, which may be a small salve for the hospitality sector.

Delivered on a day when the UK was facing mass industrial action, and concerns about a banking crisis were resurfacing, the chancellor’s positive spin on the economy was hard to reconcile with the facts. It was a disappointing budget, which was short on any real vision for the UK economy, and delivered too little, too late.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jane Mackay is national head of tax and an experienced M&A tax adviser with Crowe.

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