Presented by Chancellor of the Exchequer Jeremy Hunt on 15 March, the Spring Budget 2023 promised an ambitious package aimed at supporting the growth potential of businesses in the UK, underpinned by a raft of tax measures that included a reduction in the corporation tax rate and an increase in the Annual Investment Allowance (AIA).
With business uncertainty rife, we take a look at those announcements and analyse the likely impact they will have.
Annual Investment Allowance
Introducing the permanent £1m AIA was a step in the right direction to providing more certainty for businesses, says Richard Jones, ICAEW’s Technical Manager for Business Tax. Until the Spring Budget announcement, the AIA had been due to reduce to £200,000 from the temporary £1m limit on 1 April 2023.
“It was unclear up to this point what the limit would be in the future,” Jones says. “The AIA limit has changed multiple times since its introduction in 2008 so keeping it at its current limit helps to create certainty and removes the complexity of the transitional rules that apply every time there is a change in the limit.”
The government’s own figures suggest that around 99% of all businesses would have their eligible capital expenditure covered by the £1m AIA. This essentially takes the vast majority of businesses out of the complexity of maintaining plant and machinery pools – although there are still some assets that don’t qualify for the AIA, including non-electric cars, assets acquired by gift or assets bought to lease to someone else.
“This is primarily a simplification measure, but also provides an incentive for economic investment as businesses know they will get full tax relief for their expenditure,” Jones adds.
Full expensing and R&D
Full expensing is another Spring Budget announcement intended to fuel business growth. This deduction allows companies to claim a 100% first-year deduction from profit before tax (50% for special pool rate) on qualifying new main-rate plant and machinery investments.
Rick Smith, Managing Director of business rescue and insolvency specialist Forbes Burton, explains that eligible loss-making companies will be able to claim a payable credit rate of 14.5% for qualifying R&D expenditure instead of the 10% credit rate for companies claiming support under the previous R&D SME scheme.
This applies to companies that have ‘R&D intensity’ of at least 40%, typically aircraft, computer, electronic and software publishing companies, as well as many companies in their start-up phase where R&D is likely to take up a significant proportion of their total expenditure.
“Companies should be looking to invest where they can, so the full expensing and R&D incentives can certainly help encourage companies to invest in new equipment and develop new products,” Smith says.
Reduced corporation tax
According to Jones, full expensing is essentially an extension of the super deduction that applied for two years to 31 March 2023. Under the super deduction, companies received 130% relief at a corporation tax rate of 19% = 24.7p of tax relief for every £1 spent. Now, businesses get 100% at a rate of 25% (or 19% for companies with annual profits no higher than £50,000).
“Small and medium-sized companies will pay corporation tax at a lower rate so they will lose out, but those companies will almost certainly have all their eligible expenditure covered by the AIA so probably won’t even need to use full expensing.
“Full expensing will be of most use to the largest 1% of businesses, although they obviously contribute a significantly higher proportion of economic activity to the country per company than smaller companies,” Jones adds.
What other measures could encourage economic activity?
A response to a consultation on capital allowances by ICAEW’s Tax Faculty, published last year, includes suggestions on how the government could boost economic activity. The main points included:
- Upfront cash incentives (tax credits, grants) would be more incentivising than first-year allowances, but would also cost the Exchequer more in cash-flow terms. The government could carry out a cost-benefit analysis of such measures to determine whether the additional investment incentives it would create would justify the additional cost.
- Targeted reliefs focused on particular types of expenditure, industries or geographical areas could be more effective in incentivising investment behaviour than more general measures. The government should consider these, for example, as part of the levelling-up agenda (as it has with proposals for investment zones) or to encourage environmentally-friendly expenditure and industries.
- Greater certainty can be achieved by revisiting the rules around deductibility of incidental expenditure, such as preparation and installation costs, surveying and project management fees, etc, relating to capital expenditure projects. Much of these costs end up being neither deductible nor eligible for capital allowances and so a review of this area would really help with larger infrastructure projects (eg, installation of wind turbines).
Simon Gray, Head of Business at ICAEW, says a recurring theme in his post-Budget discussions with ICAEW members is that “it brought just a little bit more certainty to a very uncertain period”. But more could have been done, he believes.
“In a period of uncertainty, what tends to happen is that businesses will wait and see. The announcements of three years fully expensing capital allowances were welcomed, but several members did comment that this would have been better if it was a permanent relief. Instead, it’s a start-stop game that businesses are facing, having to navigate short-term cycles alongside longer-term decisions.”
Jones, meanwhile, believes that a focus on reducing business overheads will pay dividends: “If the UK wants to encourage more business growth then it could look at incentives that reduce the cost of doing business here. The upcoming business rates reforms, for example giving reliefs for improvement works increasing the rateable value of properties, should have the positive effect that businesses are looking for.”
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