Business concerns about a sudden end to coronavirus support and sweeping tax rises have been alleviated by the Chancellor’s Budget speech. Instead, the Chancellor announced a potentially game-changing measure to encourage business investment that could reshape the British economy. This will also play a part in counteracting the 25% Corporation Tax increase, which is set to come in in 2023.
In addition, the temporary extension of carry back of trading losses from the one-year entitlement to a period of three years will offset the Corporation tax increase, which will affect businesses with profits greater than £250,000 a year.
The super deduction
The super deduction on investments will come into effect next month and will end after 31 March 2023. Companies can claim on qualifying expenditures during that period: allowances of 130% on most new plant and machinery investments that ordinarily qualify for 18% main rate writing down allowances, and a first-year allowance of 50% on most new plant and machinery investments that ordinarily qualify for the 6% special rate.
It’s a game-changing measure of a sort that hasn’t been seen for decades, says Iain Wright, Director for Business and Industrial Strategy for ICAEW. “The Chancellor's announcement gives an opportunity to transition to a new economy, to recover from the biggest economic shock in 300 years, and ultimately make us more productive and competitive.”
Business investment is reducing
However, a closer look at the Treasury’s Red Book shows that business investment will reduce over the lifetime of this Parliament. There was also a lack of measures to support exports at a time when they’re expected to be subdued, with forecast rising trade deficits and international trade acting as a drag on economic growth for the medium term.
“With the national tax burden at its highest since the late 1960s, it’s clear both consumers and businesses will have to pay for the recovery – and this still might not be enough to ensure sustained recovery and get public finances and the national debt, forecast to reach £2.8tn by 2025, back on track,” says Wright.
Retail, hospitality and leisure businesses will be pleased that the business rates cliff edge in April 2021 has been avoided, says John Boulton, Director, ICAEW Technical Policy. “The £6bn cost to the Treasury of extending the holiday illustrates the significance that rates now have for these sectors. However, it was disappointing that the red book had little to offer on the longer-term reform of business rates, which is sorely needed - apart from a welcome reference to a new initiative to digitalise rates administration.”
Recovery Loan Scheme
The Recovery Loan Scheme will launch on 6 April 2021, following the closure of the current COVID-19 debt schemes on 31 March 2021. It is scheduled to run until 31 December 2021, but this is subject to review.
The new scheme aims to help businesses affected by COVID-19 and can be used for any legitimate business purpose, including managing cashflow, investment and growth. It is designed to appeal to businesses that can afford to take out additional debt finance for these purposes.
The maximum value of a facility provided under the scheme will be £10m per business. Minimum facility sizes vary, starting at £1,000 for asset and invoice finance, and £25,001 for term loans and overdrafts. There will be no turnover restriction for businesses accessing the scheme.
Businesses will be able to choose from a variety of products: term loans, overdrafts, asset finance and invoice finance facilities. Term loans and asset finance facilities are available for up to six years, with overdrafts and invoice finance available for up to three years.
Under the Recovery Loan Scheme, businesses will be required to meet the costs of interest payments and any fees associated with the facility from the outset. Businesses who have taken out a CBILS, CLBILS or BBLS facility will be able to access the new scheme, although the maximum they are allowed to borrow will depend on their lender’s assessment. Lenders will be required to undertake credit and fraud checks for all applicants, where they can overlook concerns over short-to-medium term performance owing to the pandemic.
“As companies that may have been forced to close during lockdown open for business, many will find working capital stretched,” says David Petrie, Head of Corporate Finance at ICAEW. “These additional facilities could be a very worthwhile option for many businesses.”
Future Fund: Breakthrough
Future Fund: Breakthrough, which will launch in early Summer 2021, is a new £375m scheme that will encourage private investors to co-invest with the government in high-growth innovative firms. These R&D intensive companies accelerate the deployment of breakthrough technologies which can transform major industries, develop new medicines, and support the UK transition to a net-zero economy. Future Fund: Breakthrough will be delivered via British Patient Capital, a commercial subsidiary of the Bank.
“Science-based high-tech businesses typically burn a lot of cash in their early stages. This can make obtaining sufficient funding very difficult,” says Petrie. “But things have changed and if anything, during the crisis an even greater appetite has developed for investing in high tech companies.”
The vital thing is to ensure that taxpayers get value for money, says Petrie. “The Breakthrough Fund should be structured clearly and demonstrably so as not to crowd-out already very well-funded private equity and venture capital funds. The terms will also need to be very carefully drafted so as to ensure that professional investors cannot use it simply to de-risk their existing high-tech investments or amplify returns”
Consultation into R&D tax reliefs
The consultations into R&D tax reliefs to make them more attractive to businesses is a welcome one; SME take-up of R&D reliefs is very low, and the government wants to determine why. “The government is revisiting the administration of R&D tax credits to see if there's anything else they can simplify, and to make sure that the expenditure that you can claim the relief on is still fit for purpose,” says Sarah Ghaffari, ICAEW’s Head of Business and Management.
A lack of a bigger picture
The Chancellor’s announcement could very much be described as a COVID Budget. This is welcome, says Ghaffari, but other factors are affecting businesses as well. “Brexit is one of those, and net-zero targets and SDGs. This Budget is a gift for businesses in terms of the support to get them through the short-term impacts of COVID. But there are things missing when you look at the bigger picture.”
Autumn Budget 2021
Read all of ICAEW's insights and analysis of the Chancellor's announcements on 27 October, as well as useful background information.
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