Spring Budget 2023 - Implications for Business

With the Spring Budget 2023, Jeremy Hunt became the first Chancellor for some time to deliver a conventional Budget statement. Reaching this milestone did not become an excuse for departing from the approach adopted since being parachuted into the role last year: the key announcements for business had all been widely trailed and any rabbits were determinedly non-threatening.

For all its predictability, however, the statement contained some important messages for business.

The pre-Budget calls by some MPs for the increase in the headline rate of corporation tax to 25 percent from 1 April 2023 to be scrapped were firmly rejected. In doing so, the Chancellor observed that previous efforts to maintain a low corporation tax rate had not resulted in a regime that incentivised investment as effectively as countries with higher headline rates. With the rate therefore being allowed to rise, and a new policy of finding alternative ways of encouraging investment tacitly acknowledged, will this Budget provide the incentives businesses are looking for?

By far the biggest business tax announcement in this Budget was the introduction of a ‘full expensing’ policy.

Companies incurring qualifying expenditure on the provision of new plant and machinery on or after 1 April 2023 but before 1 April 2026 will be able to claim one of two temporary first year allowances:

• a 100 percent first year allowance for main rate expenditure (‘full expensing’) and
• a 50 percent first year allowance for special rate expenditure.

The move to a ‘full expensing’ policy reflects the outcome of consultations with business and potentially provides a welcome relief (literally) for companies who were facing the double impact of the increase in the headline rate of corporation tax to 25 percent from 1 April 2023, alongside the end of the super-deduction on 31 March 2023.

Using immediate expensing as the mechanism to promote investment should also result in minimal impacts for those companies who will be subject to the UK’s implementation of the Pillar Two minimum tax, which the Government will legislate for in the Spring Finance Bill 2023.  

However, the nature of the relief means that the benefit will not be evenly distributed: the real winners here are those companies with significant qualifying capital expenditure in excess of the annual investment allowance. Those operating in sectors involving less plant and machinery spend, or loss making companies, will not have as much to celebrate.

In addition, the temporary nature of the relief means that the benefit being offered is simply one of timing. That is still valuable - and the prospect of more is offered by the Government’s statement that it intends to make this measure permanent when fiscal conditions allow - but this comment also highlights the limited room for manoeuvre the Government currently feels it has.

This difficulty perhaps also explains the absence of any clear strategy setting out the Government’s plans for business tax moving forward, similar to the ‘roadmaps’ previously published in 2010 and 2016. Understandable as that is, certainty matters. Businesses base investment decisions on the long term picture and the struggle to provide clarity on this, highlighted by the approach to the capital allowances changes, presents a challenge for businesses considering investment in the UK.

Given the constraints noted above, it is unsurprising that the other key business tax measures were carefully targeted – representing good news for those affected, but of fairly limited significance to business generally:

• The announcement of 12 new ‘Investment Zones’ across the UK had been well-trailed. Each zone will be designed to drive growth of at least one key sector – green industries, digital technologies, life sciences, creative industries and advanced manufacturing – and the locations are intended to align with the Levelling Up agenda, bringing investment into areas which have underperformed economically. From a tax perspective, Investment Zones will have access to a single five-year tax offer matching that in Freeports, consisting of enhanced rates of Capital Allowance, Structures and Buildings Allowance, and relief from Stamp Duty Land Tax, Business Rates and Employer National Insurance Contributions.
• From 1 April 2023 the Government will introduce an increased rate of relief for loss-making R&D intensive SMEs – those where qualifying R&D expenditure is worth 40 percent or more of their total expenditure. Eligible loss making companies will be able to claim £27 from HMRC for every £100 of R&D investment, instead of £18.60 for non R&D intensive loss making companies. The scheme is designed to focus support on those most impacted by the Autumn Statement 2022 changes, which saw the R&D additional deduction for SMEs reduce to 86 percent from 130 percent and the R&D credit rate for refunds reduce from 14.5 percent to 10 percent from 1 April 2023. Pharmaceutical, life sciences and computer programming firms will be key beneficiaries of this policy.
• Draft legislation will be published over the summer to reform the existing audiovisual tax reliefs into expenditure credits, modelled on the R&D expenditure credit system and offering a higher rate of relief.
• Previous proposals to limit the scope of sovereign immunity have been dropped, and amendments will be made which are intended to enhance the competitiveness of the Real Estate Investment Trust (REIT) and Qualifying Asset Holding Company (QAHC) regimes.
• From June 2023 an election window will be opened to permit shipping companies that left the Tonnage Tax regime to return to the UK.

From a business tax perspective, this was a Budget which was light on surprises or sweeping changes, preferring smaller, focussed measures. For most businesses attention will rightly be on the new ‘full expensing’ policy: but its currently temporary nature highlights the wider difficulty the Government has in making material long term changes in the current climate.