The Spring Budget 2023 - Corporate Highlights

Capital allowances

A key announcement in the Budget was the introduction of "full expensing" for certain capital expenditure by companies subject to corporation tax on qualifying plant and machinery between 1 April 2023 and 31 March 2026.

More particularly, this will mean 100% corporation tax relief on new qualifying "main pool" expenditure (which accounts for most plant and machinery), and 50% initial relief for "special rate pool" expenditure (which includes certain types of long life assets (with expected economic lives of over 25 years) and integral features such as lifts and air conditioning systems), with the balance of the special rate pool expenditure written off in future accounting periods currently at a rate of 6%.

This announcement is designed to fill in the gap left behind by the end of the "super-deduction" (which only applies to capital expenditure from 1 April 2021 to 31 March 2023) and to stimulate UK investment. From what is published so far, it appears that the rules will at largely mirror the existing super-deduction rules, easing the transition between the regimes. This includes the rules imposing a capital allowances balancing charge on the sale of assets on which full expensing has been claimed. It also includes the exclusions that applied to the super-deduction, including the exclusion for leased assets.

The material published indicates that, like the super-deduction, the new "full expensing" rules will apply to "background plant and machinery" (broadly, plant and machinery that you would normally expect to find in buildings, such as lifts). This will ensure that corporate landlords continue to have the opportunity to benefit from the UK's enhanced capital allowances regime.

The announcement of "full expensing" comes on the heels of the announcement last year that the annual investment allowance will remain at £1,000,000 and will not reduce to £200,000 from 31 March 2023 as previously planned. This means that even taxpayers outside the scope of corporation tax (and companies incurring capital expenditure on items not qualifying for "full expensing") will be able to immediately expense a significant amount of their capital expenditure.

Research and Development ("R&D")

From 1 April 2023, R&D intensive small and medium enterprises (those SMEs where qualifying R&D expenditure is worth 40% or more of total expenditure) which are loss-making, will be able to claim a higher rate of relief of a credit worth £27 for every £100 they spend.

Separately, the Government has recently consulted on merging the two R&D schemes into a single scheme. The Government has confirmed it intends to keep open the option of implementing a merged scheme from April 2024. Previously-announced changes will be legislated for in the next Finance Bill, including new categories of qualifying expenditure on data licences and cloud computing services.

R&D relief is a very valuable relief, and we will have clients who do not utilise it to its full potential. Please speak to the Tax team if you would like to know more. 

Enterprise Management Incentives ("EMI")

The Government has announced that:

• from April 2023, it will remove the requirement for a company to set out details of the share restrictions within an option agreement and the requirement for a company to declare that the employee has signed a working time declaration ("WTD"); and

• from April 2024, the period for notifying HMRC of the grant of an EMI option will be extended from the 92 days from grant currently required to 6 July in the following tax year.

It appears that the changes are being made to ease the compliance burden on companies but will also reduce the burden on HMRC in responding to queries in respect of non-compliance with these requirements. In many cases, the lack of details in respect of share restrictions, lack of a WTD and failing to notify HMRC, at least within 92 days, will likely make up the largest proportion of reasons that an EMI option may not qualify as an EMI option and resulting in enquiries to or ruling requests from HMRC.

We note from experience that HMRC has become relaxed about the lack of notification of the restrictions on shares and the WTD, hence the change in policy.

The removal of this requirement will significantly decrease the burden on companies granting EMI options and HMRC, although we consider that companies may wish to continue to see it as good practice to provide a copy of the company's articles to the option holder at the date of grant. 

The change to the notification requirement on the grant of the option should be a welcome change for companies as experience shows that this is another a part of the EMI compliance process where companies struggle to provide evidence of compliance for due diligence purposes. Companies also fail to comply with their annual reporting obligations once a scheme is set up and so aligning these may improve compliance with the annual reporting process. Leaving notification of the setting up of a scheme and grant of options until 6 July in the following tax year does present the risk of failing to notify at all. We suggest that clients continue to seek to register their EMI share scheme and notify of the grant of EMI share options as soon as possible after the date of grant. Another reason to do this is that it is not possible to submit an annual return without a scheme reference number, therefore it will remain important to notify HMRC of the scheme being setup in a timely manner to allow time for the EMI notification requirements to be met.

These appear to be sensible and welcome changes which should ease compliance requirements on companies and reduce pressure the on HMRC in dealing with compliance queries. We await to see the full details of the changes.

Seed Enterprise Investment Scheme ("SEIS")

Initially announced in the eventful "mini-budget" in September 2022, the amount of investment a company can raise is set to increase from 6 April 2023. Companies can currently receive a maximum of £150,000 through SEIS investments and this will be increased to £250,000. At the Budget, the Government announced further extensions to SEIS including:

• an increase to the level of gross assets to enable a company to qualify for investment - from £200,000 to £350,000;

• an increase to the age limit that applies to the definition of a company’s “new qualifying trade” at the date of investment - from 2 years to 3 years; and

• an increase to the annual limit of relief that investors may claim against their income tax liability – from £100,000 to £200,000.

More detailed rules will be contained in the next Finance Bill to be published on 23 March 2023.

British Patient Capital

The Government announced that British Patient Capital would be extended for a further ten years until 2033-34. British Patient Capital, a commercial subsidiary of the Government-owned British Business Bank, invests heavily in venture growth capital. It is now the largest domestic investor into UK venture capital, managing assets with a total value exceeding £3 billion. Its extension is good news for those companies in innovative sectors seeking additional funding. With a further £3 billion of Government investment, there is expected to be a renewed focus on R&D intensive industries, particularly life sciences, net zero efforts and technology. Please speak to the Tax team if you would like to discuss the range of tax-incentivised investment and venture capital schemes. 

Creative industry tax reliefs

From 1 April 2024, a new audio-visual expenditure credit will replace the current film, high-end TV, animation and children’s TV tax reliefs. The relief is designed to incentivise the output from the TV and film industry.

Following the Government’s consultation into five existing creative industry reliefs, the Chancellor announced that they will be combined to create a new audio-visual expenditure credit. The tax relief will be based on the research and development expenditure credit ("RDEC").

It means that film and high-end TV productions can claim a 34% credit whilst animation and children's TV are eligible for 39%. A newly created video games expenditure credit will also be eligible for a credit of 34%.

The separate schemes for TV and film will be merged into one to create the audio-visual expenditure credit. The effectiveness of the new audio-visual credit regime will rest on the Government's adaptation of the existing RDEC model to suit the creative industries. An overly complex application could deter the creative industry from taking full advantage of the reliefs on offer.

The new schemes will retain the current eligibility requirements as well as the definition of qualifying expenditures. The simplification of the schemes from five separate schemes into one combined scheme will be welcomed by the industry. However, a change in the way the relief is calculated will have to be examined closely to ensure businesses receive the full benefit of the relief.

A suite of technical changes to the administration of the tax reliefs have also been announced and could have significant implications for eligible companies. For example, the time limit for making a claim will change to two years from the end of the accounting period, rather than the previous 12 months from the filing date. Other administrative changes include enabling powers for HMRC to collect overpayments. Seemingly minor changes have the potential to cost companies a great deal of time and expense and should be considered carefully.

The changes announced will be published in draft form in summer 2023 at which point a further technical consultation on the measures will be opened.

Other measures for the creative industries include an extension of the higher headline rates of relief for theatre tax relief, orchestra tax relief and museums and galleries exhibitions tax relief for two years. A breakdown of the rates is as follows:

The museums and galleries exhibitions tax relief will be extended for a further two years until 31 March 2026.

Plastic packaging tax rate and late payment penalties

The Plastic Packaging Tax, which came into force on 1 April 2022 will be uprated in line with CPI from 1 April 2023. The tax, which is charged on the manufacture or import of plastic packaging, is currently charged at £200 per tonne and will increase to £210.82 per tonne from 1 April 2023. In addition, the late payment penalty regime will be amended from 1 April 2023 to treat those primarily liable consistently with those who are joint and severally or secondarily liable to make a payment of plastic packaging tax.

Real Estate Investment Trusts (REITs)

Changes to the REITs regime will mean that REITs are easier to establish in practice. If you have property investment clients, you may wish to talk to them about possible conversion to a REIT. The Tax team can help support these discussions.

The documents published alongside the Budget confirm some amendments to the REIT regime to enhance its competitiveness, and remove some administrative and cost burdens for investors. Changes will be introduced in the next Finance Bill and, in summary, will:

• with effect from 1 April 2023, remove the requirement for a REIT to hold a minimum of three properties where it holds a single commercial property worth at least £20 million;

• make amendments to the rule which deems a disposal of property within three years of having undertaken "significant development" as being outside the property rental business – it is intended that the definition of "significant" will better reflect increase in property values rather than be relative to expenditure; and

• amend the rules for deduction of tax from property income distributions paid to partnerships, to enable a property income distribution to be paid partly gross and partly with tax withheld.

The latter two measures will come into force on royal asset of the next Finance Bill. Further detail will be published when the Bill is published in draft on 23 March 2023.

Investment zones

The Budget has launched a refocused investment zones programme to catalyse growth in 12 clusters across the UK. This is a much scaled-back version of the levelling-up scheme that was initially announced by the Government in September 2022 (introduced by Liz Truss and Kwasi Kwarteng before being largely shelved in the Autumn Statement). Eight clusters have been shortlisted for England (the East Midlands, Greater Manchester, Liverpool, the North East, South Yorkshire, the Tees Valley, the West Midlands and West Yorkshire) and the remaining clusters are to be in Scotland, Wales and Northern Ireland with details to be announced by the end of 2023. The Government has invited local partners from the English clusters to begin discussions on establishing these zones.

Each English investment zone will have access to support worth a stated £80 million over five years, including tax reliefs and grant funding. Investment zones will have access to a single five year tax offer consisting of enhanced rates of capital allowances, structures and buildings allowance, relief from stamp duty land tax, business rates and employer national insurance contributions. Alongside this, investment zones will have access to flexible grant funding to support skills and incentivise apprenticeships, provide specialist business support and improve local infrastructure (dependent on local requirements).

Each zone should have the purpose of driving growth of at least one of the Government's key priority sectors, being green industries, digital technologies, life sciences, creative industries and advanced manufacturing. Additionally, plans must credibly set out how local partners intend to propel growth in priority sectors, identify private sector match funding, and use the local planning system to support growth. Plans will need to demonstrate how the investment zone will support the UK reaching net zero by 2050, the Government’s new long-term targets to protect and enhance the natural environment, and be resilient to the effects of climate change.

Business rates

Business rates are already a matter devolved to the Scottish, Welsh and Northern Irish Governments. In the Budget, the Chancellor set out further steps to allow two mayoral regions of England (West Midlands Combined Authority and Greater Manchester Combined Authority) to retain 100% of the business rates they collect. This will in turn allow these areas further capability to manage their own local transport, employment, housing and net zero priorities.

In another boost to local leadership, the Government has indicated that in the next Parliament, it would expand local retention of business rates to more geographical areas. However, there is currently little detail on how Government will engage with interested councils to achieve this.

In addition, the Government has published the summary of responses to a business rates technical consultation launched in November 2021. It constitutes the final part of the business rates review (originally commenced in March 2020) before the introduction of the Non-Domestic Rating Bill in Parliament. Amendments prompted by stakeholder participation in the consultation include:

• the extension of a proposed 30-calendar day reporting window on changes to occupier and property characteristics affecting business rates to a 60-day window;

• the extension of the three-month window to challenge 2026 rateable values to a six-month window, with the three-month window not now expected to be introduced until 2029; and

• the removal of the constraint in section 47(7) of the Local Government Finance Act 1988 on the retrospective award of business rates relief, allowing local authorities to apply relief retrospectively and set their own rules for notification of reliefs in their areas from 1 April 2024.

These moves towards devolving further powers for local areas to fully control the revenues they collect from business rates, in addition to funding announced for investment zones and levelling up projects, suggest that there will be opportunities for the regions of England (outside of London and the South East) to develop their economic landscapes to attract business and investment.

Customs – imports and exports

The Spring Budget announced a range of measures to simplify customs processes, which the Government say will support the UK’s competitiveness and promote economic growth by making importing and exporting as easy as possible for traders.

The current regime is extremely complex, and many traders fall foul of the policies and procedure inadvertently. Since Christmas alone there has been a noticeable increase in seizures activity by UKBF and HMRC for high value goods being imported that these agencies allege have not been imported in to the UK correctly. This includes incorrect tariff declarations, duty and VAT. Any simplification of the customs regime will no doubt be welcomed by traders importing and exporting.

Changes will be brought in gradually, taking into account changes that will need to be made to current systems, and to ensure that there is sufficient lead time for traders to implement the changes.

Review to simplify and streamline customs declarations

The Government is keen to take advantage of Brexit and will be working with stakeholders to review customs declarations requirements later this year to make them more streamlined. The review will cover both simplified and standard customs declarations, for imports and exports. There will be a particular focus on export declarations, as well as on ensuring that customs declarations do not impose disproportionate burdens on small and less experienced UK businesses. It is usually the smaller and less experienced businesses that inadvertently fall foul of these regimes.

Simplified Customs Declaration Process improvements ("SCDP")

As a result of an earlier review that was carried out in 2022, improvements to the SCDP include increasing the amount of time traders have to submit supplementary returns and allowing traders to submit one supplementary declaration for goods imported over the course of a month (known as aggregation), reducing the total number of declarations that have to be submitted. This is the most significant improvement and will help in reducing the duplication of work whilst making declarations. It must be noted, that no timeframe has been announced for these changes to take place, and the Government will work with stakeholders to set timeframes for delivery.

Introducing voluntary standards for customs intermediaries

Customs intermediaries offer a vital service to importers and exporters of goods, often by completing customs declarations and collecting and paying tariffs, duties and import VAT. However, this industry varies significantly in the quality of the service provided. Mistakes made by the intermediaries can lead to seizures as well as duty and VAT assessments against the owner or holder of goods. The Government will consult in summer 2023 on introducing a voluntary standard for customs intermediaries, with the aim of improving the overall quality of service provided across the sector.

Transit policy simplifications

The Government wants to introduce measures to simplify the transit facilitation. Transit is currently a customs special procedure which is governed by the Common Transit Convention (CTC). The CTC allows goods to move under duty suspense across multiple customs territories until the goods arrive at their final destination, at which point customs duties and VAT become applicable. The new measures will improve processes for both outbound and inbound movements as well as procedures for in response to feedback consignee/consignors. There is currently a plethora of procedures that need to be completed when closing a movement of goods, and any simplification and clarity that can be provided to traders is to be welcomed.

Modernising Authorisations

The Government will engage with stakeholders in spring 2023 on plans to streamline and digitise HMRC’s customs and excise authorisation processes through the Modernising Authorisations project, which aims to simplify authorisations for customs facilitations and deliver a new digital self-serve portal for traders. These improvements will lead to traders being able to manage, view and amend their movements in real time. Often issues arise where amendments or changes have been made but the system has not been updated at the point of a check by the relevant authorities.

Changes to Customs Guarantees for Special Procedures, Temporary Storage and Duty Deferment

The Government will engage with industry in spring 2023 on potential changes to enable more traders to be authorised to use certain customs facilitations (Special Procedures, Temporary Storage and Duty Deferment) without a financial guarantee. This would remove the cost of providing a guarantee for more traders who use these facilitations to delay (or in certain circumstances relieve) payment of import duties.

The Government removed the guarantee requirement for most traders in January 2021, taking advantage of the flexibility of being outside the EU, and is now considering further changes to enable more traders to use these customs facilitations without a guarantee and benefit from the associated cost saving.

This policy change will help deliver the Government's mandate on growth by allowing smaller traders to import/export goods without providing expensive guarantees and purchasing expensive insurance policies.

Anti-avoidance

No Budget is complete without a new anti-avoidance measure. This Budget is no exception, with the Government setting out plans to double the maximum sentence for tax fraud from seven to 14 years, and consulting on the introduction of a new criminal offence for promoters of tax avoidance who fail to comply with a legal notice from HMRC to stop promoting a tax avoidance scheme. HMRC already has a range of powers to tackle evasion and avoidance, but clearly the Government wants another weapon in its armoury in an attempt to close the tax gap.

Pensions taxation

As widely touted beforehand, the Chancellor announced a number of changes to pension taxation allowances and thresholds.  The Government suggests this package of measures is part of a broader attempt to get people, particularly those aged 54 to 60 back into work, and to stay in work longer.

Tinkering with pension tax allowances has been mooted for a number of years, particularly in response to the headline-grabbing issue of NHS doctors and other public professionals retiring early or reducing their hours to avoid exceeding the annual and lifetime allowances (over which they would face punitive tax charges), due to the multiple applied to their defined benefit pension schemes.

From 6 April 2023, there will be changes to the annual allowance, the lifetime allowance and the money purchase annual allowance.

The annual allowance imposes a limit on the amount which can be saved in a pension pot (including defined contribution and defined benefit schemes) in each tax year, without incurring a specific tax charge. For defined benefit schemes, the limit applies by reference to a multiple of the annual increment in pension benefit. From 6 April 2023, the annual allowance, will be raised from £40,000 to £60,000. There are also increases to the levels at which the annual allowance is tapered for higher earners (the adjusted income threshold will increase from £240,000 to £260,000).

The "rabbit out the hat" announcement in the Budget was the abolition of the lifetime allowance, the maximum amount of saving that a member can make in a registered pension scheme without incurring a tax charge. The lifetime allowance is currently £1.07 million. The charge will be removed from 6 April 2023 and abolished fully from 6 April 2024. Although there will be no limit on the size of the pension pot that can be saved without a tax charge, the tax-free 25% will continue to apply to only the first £1.07 million of pension savings.

The money purchase annual allowance (which limits the tax-relieved savings an individual can make into a registered pension scheme once they flexibly access their defined contribution pension savings) will be increased from £4,000 to £10,000.

The increased thresholds will only impact a very small percentage of the workforce and is particularly beneficial to higher earners who've earned enough in their lifetime to push these thresholds, typically those in government service or quasi-government service including doctors, senior teachers, civil servants and police officers. The majority of the UK population will not benefit from these changes. It has to be said that the policy objective could have been achieved more simply and without reintroducing a tax subsidy for retirement saving for the highest paid.

In addition to changes to the thresholds, the Government will also be consulting on aspects of the management of assets by the Local Government Pension Scheme in England and Wales. The Government has set out that it will publish a consultation shortly to propose:

• the transfer of all listed assets into their pools by March 2025;

• using a smaller number of pools in excess of £50 million to optimise benefits of scale; and

• the use of investment opportunities in illiquid assets.

A key tenet of an effective tax system is the ability for taxpayers to anticipate the tax effect of actions they take. This requires a degree of stability. Whilst appreciated by a small group of people in the short term, additional tinkering and complexities are the enemy of much-needed stability. Pension taxation and its reform needs to be considered as a whole in the long term and requires a considered approach: it appears unlikely to be forthcoming from this Government. The question will be what its successor will do when it takes office in less than two years from now.

If you would like to discuss any of the above measures please contact any member of the Tax team.