In addition to the headline rate changes to the main rate from 14 percent to 12 percent (the second reduction in two years) and an increase in the plant and machinery first year allowance (FYA) from 40 percent to 50 percent, HMRC published the responses to their consultation on pre-development costs with further details included in the wider programme to simplify aspects of the UK’s Corporation Tax system. These documents include areas where they are exploring changes to guidance and, where necessary, legislation, to meet calls for clarity in this area following the Orsted case.
Allied with the changes to the Advance Tax Certainty Service (see our separate article Budget: Simplifying business investment for more details on this), there appears to be a focus on providing clarity and certainty for businesses undertaking large-scale infrastructure projects, which can only be positive for investment. Although, we will have to wait to see what is proposed on predevelopment costs, and whether it will be sufficient to meet the industry’s calls for clarity.
Overall, capital allowances continue to represent a valuable, if sometimes complex, relief for any businesses incurring capital expenditure. These changes emphasise the benefit of seeking timely advice, given the historically high difference between the main rate and first year allowances (either under full expensing or main rate FYA).
Separately, an amendment to s228G CAA 2001 will be made to take account of right of use lease accounting – this provision appears to have ’slipped through the net’ when Finance Act 2019 made changes to other provisions which apply to finance leases. It is expected that the proposed changes will clarify that a right of use lease is considered a finance lease for the purposes of s228G (if an operating/finance lease test, such as old FRS 102, was applied to it). This section is of very limited application, as it is only relevant if there is a lease and finance leaseback of plant and machinery and if certain tests are met (which are extremely hard to meet in practice).
Research and Development (R&D) tax incentives
The Budget signals a continued focus on simplifying the UK’s R&D tax incentives. The Claim Notification Form requirement will be removed for claims made on or after 1 April 2027, while the Additional Information Form will be simplified from Autumn 2027, with further detail to follow.
The Government is also exploring further changes to the PAYE/NIC cap, going concern requirement and enhanced R&D intensive support (ERIS) intensity ratio calculation. Wider administrative improvements being considered include integrating forms to avoid duplication, and allowing claimants to track the progress of their claims and tax credit payments. Together, the announcements appear to represent a welcome move towards a simpler and more streamlined claims process.
Patent Box relief
The Government reiterated the importance of the Patent Box in encouraging the commercialisation of intellectual property in the UK, while recognising concerns over the regime’s complexity.
Potential simplifications are being explored by the Government, including removing certain computational requirements for companies below a de minimis income level, introducing sector-specific Routine Return percentages, and allowing higher-level streaming of income and expenditure. Whilst still at an early stage, these proposals could reduce the administrative burden for existing claimants and make Patent Box more accessible to businesses where the compliance effort has previously been high, or potentially disproportionate to the benefit.
Intangible fixed asset regime
Also, as part of the wider programme to simplify aspects of the UK’s Corporation Tax system, the Government has welcomed views on a number of areas where the current intangible fixed asset rules (which include intellectual property and goodwill) may create complexity or uncertainty for businesses. The areas identified include the restrictions on acquired and created goodwill and customer related intangibles, such as customer contracts, the application of the rules to partnerships (which can be particularly restricting when moving goodwill and intellectual property into and out of LLPs) and the tax treatment of licences over intangible fixed assets.
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