Four pillars underpinned the Chancellor’s Budget today: Enterprise, Employment, Education and Everywhere. With a clear theme of getting people back to work, announcements included significant changes to pension limits and the introduction of “Returnerships”, being apprenticeships for over 50s who wish to return to work. Working parents will also be offered an expanded childcare support package in an attempt to remove one of the biggest barriers to parents working. However, today’s Budget was light on business tax announcements. This was to be expected given the drastic tax measures announced in 2022 and their impact on the UK economy, and also in light of the upcoming general election. Whilst there were no ground-breaking business tax announcements today, there were still many matters of interest, particularly for those in the life sciences and technology sectors.
Life Sciences and Technology related measures
R&D Tax Reliefs
SMEs operating in the life sciences sector and businesses investing heavily in R&D in areas such as computer programming, AI and other digital based technologies will have been delighted by today’s announcement that the SME payable tax credit rate will remain at 14.5% (rather than reduce to 10% as announced in the Chancellor’s Autumn Statement on 17 November 2022) for expenditure incurred on or after 1 April 2023, provided they can show that they spend 40% or more of their total expenditure on qualifying R&D (and thus qualify as a “R&D intensive company”).
The SME rate will, however, remain at 10% for all SMEs that do not qualify as R&D intensive. For all SMEs, however, the payable credit will be calculated on the basis of an additional deduction for qualifying R&D expenditure of 86% (reduced, following the Chancellor’s announcements in the autumn, from the generous 130% additional deduction that is in place until the end of March). In practice, this means that for a loss-making R&D intensive company, it could receive a payment from the Government of £26.97 for every £100 it spends on R&D. For SMEs that do not reach the 40% qualifying expenditure cut off, their potential payment will be limited to £18.60 per £100 spent.
Draft legislation setting out the rules for calculating whether an SME meets the 40% test, as well as detailed guidance for those in industry trying to apply the rules, will be published in the summer with the Finance Bill. As this will be after 1 April 2023, when the rules come in, companies that think they are likely to qualify may wish to delay making claims until later in the year. If companies do not wish to wait, they can claim on the basis of the reduced 10% rate and then put in an amended claim once the new rules have come into force. One reason why companies might prefer not to wait is that the Government has already indicated that claims made under the enhanced scheme for R&D intensive companies may take longer to process than normal SME claims as additional checks may be required.
There were no new announcements regarding the ongoing RDEC (Research & Development Expenditure Credit) scheme for larger companies. The increase of the RDEC rate from 13% to 20% announced in the Autumn Statement was, however, confirmed. Businesses will, however, be pleased that the proposed restriction to the inclusion of some overseas expenditure in R&D relief claims (announced by the Government in 2021) has been deferred for a year and will not now come into effect until 1 April 2024. The reason given for this is that the Government needs time to consider whether or not, and, if so, how, it will introduce a “merged” new R&D scheme rather than having the separate SME and RDEC schemes. The consultation on this proposed merger closed on 13 March 2023 and the Government is intending to release a summary of responses and draft legislation for a proposed merged scheme in July 2023 in order to keep this open as an option.
The change to the SME scheme for R&D intensive companies is obviously welcome and shows that the Government has listened to industry concerns about the rise in the rate of corporation tax and the reduction in the SME R&D scheme benefits announced in the autumn. However, businesses will still be in a considerable state of uncertainty as to exactly how these latest announcements will be brought into effect and whether they will be carried through to any merger of the two R&D regimes.
The Chancellor announced various other measures aimed at the life sciences and technology sectors, including support for the Medicines and Healthcare products Regulatory Agency (MHRA) to become “faster and nimbler”, by accelerating patient access to treatment including putting in place a swift approval process from 2024 for the most impactful new medicines and technologies. The Budget also covered support for further growth in the life sciences sector (such as the Long-term Investment for Technology and Science initiative), as well as measures to promote innovation and a thriving digital economy (including better regulating the applications of AI).
Corporate and business taxes
Despite pressure from various Conservative MPs and a swathe of entrepreneurs, Jeremy Hunt confirmed that the rate of corporation tax will rise, as planned, from 19% to 25% from 1 April 2023; although the Chancellor commented that only 10% of businesses would actually pay tax at the 25% rate.
Effective from 1 April 2023 to 31 March 2026, the newly introduced full expensing capital allowance allows UK companies to deduct 100% of the cost of qualifying main rate plant and machinery from their taxable profits in the year of investment. The Chancellor confirmed that the Government will endeavour to make the policy permanent as soon as practicable, as part of his commitment to maintain a stable economy. The Office for Budget Responsibility has suggested that, even as a temporary measure, the policy will increase business investment by 3% each year until 31 March 2026.
Companies will also be able to deduct 50% of the cost of special rate (including long life) assets from their profits in the year of investment as part of the 50% first-year allowance. The Chancellor confirmed that this allowance will be extended to 31 March 2026, and that the Government has a similar intention to make the policy permanent.
Businesses will also benefit from the decision in the Autumn Statement 2022 to make the Annual Investment Allowance (AIA) permanent. This provides 100% first-year relief for plant and machinery investments up to £1 million.
Personal and employment taxes
The Annual Allowance will increase from 6 April 2023 to enable individuals to contribute up to £60,000 per annum into their pension scheme. Any unused Annual Allowance may be carried forward from the three previous tax years. Whilst many expected the Lifetime Allowance of £1.07 million to be increased, the Chancellor actually announced that the Lifetime Allowance Charge will be removed from April 2023 before the Lifetime Allowance is abolished entirely from April 2024.
Tax measures for growth companies
Enterprise Management Incentives (EMI)
In a bid to simplify tax measures for growing companies, the process for granting options under the EMI scheme is being simplified. This will be welcome news for businesses that incentivise their staff using an EMI scheme. From April 2023, companies will no longer need to set out restrictions on shares within an option agreement or declare that an employee has signed a working time declaration. From April 2024, companies will have until the 6 July following the end of the tax year to notify HMRC of the grant of an EMI option (instead of the existing 92 days following grant). This notification deadline will align with that of the annual share schemes return.
Confirmation of Company Share Option Plans (CSOPs) and Seed Enterprise Investment Scheme (SEIS) changes
Following the announcement in Autumn 2022, the Budget confirmed that the proposed CSOP reforms will enter into force from April 2023. The maximum share option limit based on value at grant will be increased from £30,000 to £60,000 and there will also be changes to the share class requirement rules to align more closely with the EMI rules.
It was also confirmed that the SEIS changes announced in Autumn 2022 will be enacted in April, with companies able to raise up to £250,000 of SEIS investment, an increase from the current limit of £150,000.
The Government will also be launching a call for evidence on the Share Incentive Plan (SIP) and Save As You Earn (SAYE) employee share schemes with the aim of improving and simplifying the schemes.
Clamping down on tax avoidance and fraud
As part of the Government’s initiative to ensure that public services are equitably funded by preserving a low “tax gap”, the maximum sentence for the most serious cases of tax fraud will be doubled from 7 to 14 years. The Government will also consult on the introduction of new criminal offences for those failing to comply with HMRC notices to stop promoting tax avoidance schemes.
Other notable announcements
- Audio-visual tax reliefs for the creative industries will be reformed to become more generous “expenditure credits”, and the temporary higher rates of tax relief for theatres, orchestras, museums and galleries will continue into 2024, decreasing in 2025 and 2026 until they return to their original rates.
- New Investment Zones are being launched across the UK in 12 high-potential areas. Each Zone will have access to a five-year tax offer matching Freeports, consisting of enhanced rates of Capital Allowance, Stamp Duty Land Tax and National Insurance contributions amongst other tax reliefs.
- The Office of Tax Simplification has officially been abolished, but the Government have confirmed their intention to continue to focus on simplicity of tax policy design.
If you would like further information in relation to any of these measures, please contact a member of our tax team.