UK Spring Budget 2023

Everywhere, Enterprise, Employment and Education…but not All at Once

Given the Chancellor was on his feet for an hour, aside from a couple of high-profile business tax changes, there is surprisingly little to report from today’s Spring Budget.

Much media coverage will be given to the childcare reforms and complaints that the children who will fully benefit have not yet been conceived. But this is largely a “giveaway” budget with very little new announced to raise revenue. Unlike the catastrophic “Mini Budget” of the previous administration, this has been fully costed and run through the OBR, with most of the tax cuts and spending being funded by freezing tax rates (i.e. not increasing them in line with inflation).

Jeremy Hunt referred to his “Four Es – Everywhere, Enterprise, Employment and Education” which he plans to use to drive economic growth. Most of the tax announcements fell under the “enterprise” heading including, as set out in more detail below, full capital expensing and changes to R&D tax credits. After the chaos of the last couple of years, being labelled as boring is probably exactly what the Chancellor was aiming for.

Innovation

R&D

In a win for small R&D intensive businesses, a higher rate of R&D relief for loss-making SMEs will be introduced from April 2023. SMEs for which qualifying R&D expenditure constitutes at least 40% of their total expenditure will be able to claim a higher payable credit rate of 14.5% for qualifying R&D expenditure (rather than the lower rate of 10% which would otherwise apply). Eligible loss-making companies will therefore be able to claim 27p from HMRC for every £1 of R&D investment. In addition, the previously announced restriction on claims for overseas expenditure will be delayed until April 2024. This is to allow the government time to consider the interaction between this restriction and the design of a potential merged R&D relief scheme, which would see the RDEC scheme and the SME scheme merged into one. The government recently consulted on merging the two schemes and intends to publish draft legislation on the merged scheme for technical consultation in the summer, together with a summary of responses to the consultation. The government has said that it “intends to keep open” the option of implementing a merged scheme from April 2024.

Audio-Visual Reliefs

Film, TV and video games tax reliefs, which currently take the form of additional deductions, will become expenditure credits from April 2024. The new Audio-Visual Expenditure Credit will provide for a credit rate of 39% for animation and children’s TV and 34% for film and high-end TV, with the expenditure threshold for high-end TV remaining at £1m per hour. Tax relief for video games will take the form of the Video Games Expenditure Credit, which will have a credit rate of 34% and apply to expenditure on goods and services that are used or consumed in the UK. Games that have not concluded development by 1 April 2025 may continue to claim in respect of EEA expenditure under the current video games tax relief scheme until April 2027.

Creative Reliefs

The government plans to extend the temporary higher headline rates of Theatre Tax Relief (TTR), Orchestra Tax Relief (OTR) and Museums and Galleries Exhibition Tax Relief (MGETR) for an additional two years. The headline rates of relief for TTR and MGETR will remain at 45% and 50% for non-touring and touring productions respectively, and at 50% for OTR. From April 2025, the rates for TTR and MGETR will go down to 30% and 35% and will return to 20% and 25% one year later. The headline rates of relief for OTR will return to 25%. In line the changes to audio-visual reliefs, qualifying expenditure will be changed to expenditure on goods and services that are used or consumed in the UK. However, productions that have not concluded by 1 April 2024 may continue to claim EEA expenditure until 31 March 2025.

Business Tax

Capital Allowances

With the headline rate of corporation tax increasing to 25% from April 2023 and the super-deduction coming to an end on 31 March 2023, the Chancellor has announced two major changes to the capital allowances regime, worth £27b over the next 3 years.

From 1 April 2023 to 31 March 2026, taxpayers will be able to fully expense the cost of certain plant and machinery from their profits before tax. It will apply to spending on main rate equipment such as warehousing and construction equipment, computers and office equipment and some fixtures. In addition, the current 50% first year allowance on special rate equipment, such as solar panels and other long-life assets, will be extended by 3 years until 31 March 2026.

Both measures are in addition to the permanent £1m threshold for the Annual Investment Allowance, previously announced. Expenditure on plant and machinery for leasing is excluded from the changes.

Capital Gains

Additionally, the government will legislate to close a loophole which can leave HMRC out of time to assess tax due on capital gains if an asset is disposed of under an unconditional contract. This change will only apply to contracts entered into on or after 1 April 2023.

Carried Interest

The government is introducing a new elective accruals basis of taxation for carried interest. This will allow UK resident investment managers to accelerate their tax liabilities in order to align their timing with the position in other jurisdictions where they may obtain double taxation relief. This will apply from 6 April 2022.

Simplifying the Enterprise Management Incentive Plan

EMI is a popular employee share option plan with great tax breaks (https://www.twobirds.com/-/media/pdfs/expertise/employment/employment-incentive/enterprise-management-incentive-plan-2022.pdf) which is widely used by many of our corporate clients.

One of the problems has been some of the reporting rules which can trip clients up so the government announced two improvements today. From April 2023, the requirement for the issuing company to notify participants of restrictions applying to option shares in the option agreement will be removed, it will be sufficient to refer to the articles or shareholders agreement. This is very welcome as it often caused disputes in M&A deals as to whether participants were adequately notified and the consequences if they were not. Unfortunately, the changes will not be retrospective.

From April 2024 the deadline for reporting the grant of EMI options will be extended from 92 days following grant date to 6 July following the end of the tax year of grant making it less likely the deadline will be missed. HMRC have taken a very strict approach to ‘reasonable excuse’ claims, so the 92-day deadline often meant options do not qualify for tax relief.

Sustainability

The government has set out extensive ambitions to tackle climate change and provide funding for carbon capture, nuclear and energy relief support, as well as to support growth in green industries and innovation in green technologies, with details to follow on further actions to ensure clean energy security in the UK and meet net zero commitments. In connection with this there are some green tax-related announcements of note in today’s Spring Budget:

• VAT relief for energy saving materials – The government has published a call for evidence on options to reform the VAT relief for the installation of energy saving materials in the UK (in divergence from the EU), to consider, in particular, the inclusion of additional technologies and the possible extension of the relief to include buildings used solely for a relevant charitable purpose.
• VAT and Deposit Return Schemes – The government has announced it will legislate to simplify the VAT treatment of deposits charged under a deposit return scheme for drinks containers. This will ensure that, where a deposit is charged on a drink that is within the scope of a deposit return scheme and the container is returned for recycling, VAT will not be applied to the deposit amount. Where the container is not returned for recycling, HMRC will collect the VAT on the unredeemed deposit.
• Plastic Packaging Tax - The Plastic Packaging Tax rate will increase in line with CPI, from 1 April 2023.

Personal Tax

Pensions

The government will increase the Annual Allowance (which limits the amount of pension benefits an individual can accrue each year) from £40,000 to £60,000 from 6 April 2023. Individuals will continue to be able to carry forward unused Annual Allowances from the 3 previous tax years.

The government will also remove the Lifetime Allowance charge from 6 April 2023, before fully abolishing the Lifetime Allowance in a future Finance Bill. The Lifetime Allowance (which limits the amount of tax-advantaged pension savings an individual can accumulate in aggregate), currently £1.07 million for this tax year, is the amount an individual can accumulate across all their pension schemes (excluding the state pension) and not incur an extra tax charge – which is 55% on amounts above the allowance. As a result of the change, individuals will now be allowed to put aside as much as they want in their private scheme without being taxed.

The increase of the Annual Allowance and the abolition of the Lifetime Allowance would appear to be the means to attract older workers to delay retirement or to attract early retirees back into the workforce. The measures will be most helpful to high earners in generous defined benefits pension schemes e.g. senior doctors. In the private sector, many employers have been paying senior executives (who are affected by the caps) extra cash in lieu of pension contributions. These arrangements should now be reviewed as it may be beneficial to both the employers and the executives for tax-advantaged pension contributions to be used instead of cash as part of the remuneration package.

The maximum Pension Commencement Lump Sum, i.e., the maximum amount of tax-free lump sum when accessing a pension, for those without protections will be retained at its current level of £268,275 and will be frozen thereafter.

The government will increase the Money Purchase Annual Allowance (MPAA) from £4,000 to £10,000 and the minimum Tapered Annual Allowance from £4,000 to £10,000 from 6 April 2023. The MPAA impacts those who have begun to withdraw a taxable income from a pension and would like to continue building further retirement savings. The MPAA applies to defined contribution pensions only.

For higher earners, the adjusted income threshold for the Tapered Annual Allowance will also be increased from £240,000 to £260,000 from 6 April 2023.

These changes to the MPAA and the Tapered Annual Allowance are also aimed at giving individuals more headroom to save more towards their pensions.

Identifying Cryptoassets

From the tax year 2024-2025, the government is introducing a change to the Self Assessment tax return forms requiring cryptoassets and their value to be identified separately. It is estimated that the additional clarity will raise £10m a year for HMRC.

And finally...

As part of his plan to get more over 50s back into the workforce, the Chancellor announced a new apprenticeship-type “Returnership” scheme. Along with Skills Bootcamps and Midlife MOTs, early retirement is sounding less relaxing…