Spring Budget 2023: Business tax measures

Enterprise, Everywhere (all at once?)

Having sought to stabilise the economy with his Autumn Statement, Jeremy Hunt's first Budget was all about growth and his four pillars of industrial strategy: Enterprise, Employment, Education and Everywhere. Recognising that a competitive corporate tax system is essential for encouraging investment and innovation, the Chancellor announced a series of tax measures to create a culture of Enterprise and spread opportunity Everywhere.

In this briefing we consider the main tax proposals announced at Spring Budget 2023 and their impact on clients. If you would like to discuss any of these measures, please get in touch with a member of the tax team or your usual Taylor Wessing contact.

Enterprise

The Spring Budget purportedly delivers a range of Enterprise boosting tax measures to attract the most productive companies to set up, invest and grow in the UK:

Corporation tax

Despite calls from all sides to abandon the imminent hike in corporation tax, no such announcement was forthcoming. Nor was the 'roadmap' to a lower rate that some had predicted (although much was made of the fact that the UK will still have the lowest rate of corporate tax in the G7).

The main rate will therefore rise to 25% from 1 April on profits over £250,000, with the current 19% rate applying to profits of £50,000 or less. Businesses with profits between £50,000 and £250,000 will be taxed at the main rate but may claim marginal relief.

The government also confirmed that it will be implementing the OECD's 'Pillar 2' proposals from the start of 2024, which impose a 15% minimum effective tax on the accounting profits of the largest groups.  UK-parented groups with revenues in excess of €750m will be liable to pay 'multinational top-up tax' if the effective rate of tax in any of the territories in which they operate falls below 15%.  The UK subsidiaries of foreign-parented groups will potentially be liable to a domestic top-up tax, which operates in a similar manner on UK domestic profits.

Capital allowances

Although full expensing had been mooted as an option to replace the super-deduction when it expires this month, it was still somewhat surprising when Jeremy Hunt announced the introduction of a three-year 100% first year allowance for main rate assets (in addition to a three-year extension of the temporary 50% first year allowance for special rate assets introduced in 2021).

At first glance the super-deduction 2.0 appears less generous than its 130% relief predecessor, although the upcoming increase in the corporation tax rate helps even things out. As the government is at pains to emphasise, it provides the joint most generous capital allowances regime in the OECD, and its promise to put the relief on a permanent footing as soon as 'economically responsible' is no doubt intended to encourage continued capital investment. Whether businesses are prepared to commit to such expenditure in the current economic climate remains to be seen.

Research & Development (R&D) tax relief

In order to support innovation, the government has announced a new scheme for loss-making R&D intensive small and medium size enterprises (SMEs). From April this year, companies whose qualifying R&D expenditure constitutes at least 40% of total expenditure will be eligible for a higher 14.5% payable credit rate (rather than the current 10% rate for companies claiming under the existing R&D SME scheme). This will come as a relief to many businesses adversely impacted by the R&D relief rate changes announced at Autumn Statement 2022.

An update has also been given on last year's consultation on merging the R&D Expenditure Credit (RDEC) and SME R&D tax relief schemes. While no final decision has yet been made, the government will publish draft legislation for technical consultation this summer with a view to possibly implementing a merged scheme from April 2024.

The ongoing R&D tax relief review has also resulted in a year-long delay to the restriction on relief for certain overseas expenditure, which will now come into force in April 2024.

Audio-visual and other creative industry tax reliefs

Following last year's consultation, a new Audio-Visual Expenditure Credit will be introduced from 1 April 2024, replacing the current film, high-end TV, animation and children's TV tax reliefs. Film and high-end TV will be eligible for a credit rate of 34%, with animation and children's TV attracting a 39% rate. The expenditure threshold for high-end TV will remain at £1m per hour.

The new Video Games Expenditure Credit, for expenditure on goods and services used or consumed in the UK, will attract a credit rate of 34%. It was also announced that theatre and orchestra tax reliefs will be kept at 45% and 50%, respectively, for a further two years from April.

Enterprise Management Incentives (EMI)

From 6 April 2023, the process of granting EMI options will be simplified. For options granted from that date it will no longer be necessary to for a company to set out details of share restrictions within the option agreement or declare that an employee has signed a working time declaration. Existing EMI options granted before 6 April 2023 that have not been exercised will also benefit from these simplifications.

Further, from April 2024, the deadline for a company to notify HMRC of the grant of an EMI option will be extended from 92 days following grant to the 6 July following the end of the tax year.

The government has also announced a call for evidence in respect of two other UK tax favoured share plans: Share Incentive Plan (SIP) and Save As You Earn (SAYE). Simplification of these all-employee plans could be of benefit to companies who currently find them too onerous and costly to implement.

Customs

Taking advantage of Brexit freedoms, a range of measures to simplify customs processes have been announced to make importing and exporting as easy as possible for traders, including improvements to the Simplified Customs Declaration Process.

Real Estate

For the UK real estate market the detail has now been published on the so-called Edinburgh Reforms to the REIT rules which introduce three welcome changes with effect from 1 April 2023 to:

• remove the requirement for a REIT to hold a minimum of three properties where it holds a single commercial property worth £20m or more
• amend the deemed disposal rules for significantly developed property so that the test is based on a valuation increase
• allow for property income distributions (PIDs) paid to partnerships to be paid partly gross and partly subject to withholding tax.

The REIT regime changes had already been announced in December 2022 but hidden in the detail today was a very welcome additional announcement that the sovereign wealth exemption from direct taxation will remain, which will be a relief to UK real estate funds. 

Prior to 15 March 2023, charities located in the UK, EU or EEA could qualify for charitable tax reliefs in the UK including from stamp duty land tax (SDLT) and the annual tax on enveloped dwellings (ATED). However, with effect from the day of the Budget, non-UK charities will not be able to claim UK charitable tax reliefs unless they asserted their status to HMRC for charitable tax reliefs by Budget day.

Everywhere

Having originally been launched in Kwasi Kwarteng's ill-fated Growth Plan of September 2022, refocused Investment Zones now form part of Jeremy Hunt's 'Levelling Up' agenda with the aim of delivering benefits of economic growth Everywhere:

Investment Zones

Although not a particularly innovative idea for stimulating investment, given their similarities to Freeports, the government plans to establish 12 Investment Zones across the UK in which 'special tax sites' are designated. Targeting growth in sectors such as digital technologies and life sciences, these 'high-potential knowledge-intensive growth clusters' will offer a package of tax benefits including:

• SDLT relief for purchases of land or buildings acquired for qualifying commercial purposes and used for such purposes for up to three years.
• Enhanced capital allowances for companies incurring qualifying expenditure on new plant and machinery primarily for use in a special tax site.
• Enhanced structures and buildings allowances of 10% per year for 10 years for qualifying expenditure on non-residential structures and buildings situated in special tax sites.
• National Insurance Contribution (NICs) relief for employers with physical premises in a special tax site on earnings of new employees who spend 60% or more of their working time there. This rate can be applied on the earnings of all new hires up to £25,000 per year for three years.

Whilst an interesting development, relatively small sums have been ear-marked for each zone (£80m per zone, spread over five years), which may limit their effectiveness.

All at once?

Given that the Spring Budget marks the fourth fiscal event in six months, we could be forgiven for hoping that all might be quiet on the tax front for the foreseeable future. However, with the UK economy remaining precarious, it can only be a matter of time before further tax changes are on the table.