Despite pressure to reverse the corporation tax regime and rate changes which take effect from 1 April 2023, the Chancellor confirmed that these are proceeding as previously announced. However, as the 130 percent super deduction for companies comes to an end later this month on 31 March 2023, he recognised the need to incentivise companies to invest in capital spend. The most significant changes made for businesses were the announcement of full expensing (100 percent relief) for capital allowances on new plant and machinery spend by companies for three years. A “refocused” investment zones programme is to be launched and further changes were announced to the UK’s R&D tax relief and creative sector relief regimes.
A systematic review will also be undertaken of HMRC guidance and key forms for small businesses and the Spring Budget’s main publication also published details of a range of measures designed to simplify customs import and export processes.
From 1 April 2023 to 31 March 2026, investments by companies in qualifying new main rate plant and machinery, but not cars, will qualify for a 100 percent first-year allowance. This is known as full expensing.
Companies investing in special rate assets, such as integral features and long life assets, will benefit from a 50 percent first-year allowance in the year of investment, effectively continuing the current 50 percent special rate allowance which is available until 31 March 2023.
Expenditure on plant or machinery for leasing will not qualify for either relief, except where it is under an excluded lease of background plant or machinery for a building,
The £1 million annual investment allowance will also continue to be available to companies and groups of companies.
More detailed guidance on full expensing is available which confirms that, like the rules for the current 130 percent super-deduction and 50 percent special rate allowance, special rules will apply when assets qualifying for these new reliefs are disposed of via the requirement for calculation of a balancing charge.
For the disposal of an asset on which a company has claimed full expensing, the company will be required to bring in an immediate balancing charge equal to 100 percent of the disposal value. For the disposal of an asset on which a company has claimed the 50 percent first-year allowance, the company will be required to bring in a balancing charge equal to 50 percent of the disposal value. The remaining balance of 50 percent will be treated in the normal way and so will be deducted from the special rate pool.
Note that full expensing will not be available to unincorporated businesses, however, these businesses will still benefit from the £1 million 100 percent annual investment allowance limit for new and unused plant and machinery (excluding cars) and special rate pool assets which will be permanently fixed at £1 million from April 2023, as previously announced.
Although full expensing is currently scheduled to be available for three years from 1 April 2023, the Chancellor confirmed that the government intends to make this measure permanent when fiscal conditions allow.
Research and development (“R&D) tax reliefs
To help encourage innovation, the Chancellor announced additional support for R&D intensive small and medium sized enterprises (“SMEs”) where the company is loss making. An R&D intensive SME was described in the Chancellor’s Budget speech as a company spending 40 percent or more of their total expenditure on R&D. More details are available in HMRC’s policy paper.
A new payable credit rate will be available to these R&D intensive companies who will be able to claim a payable tax credit rate of 14.5 percent for qualifying R&D expenditure, compared to the lower 10 percent available to other SMEs from 1 April 2023. These changes will take effect from 1 April 2023 with eligible companies able to claim once the Finance Bill has received Royal Assent.
Readers are reminded that other previously announced changes to the rates of R&D tax relief were contained in Finance Act 2023, as a result of the 2022 Autumn Statement, and take effect from 1 April 2023. The rate of relief for SMEs will fall from 130 percent to 86 percent whilst the payable tax credit will fall from 14.5 percent to 10 percent. The rate of relief for companies claiming under the large company regime will increase from 13 percent to 20 percent.
However, the previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023. This is designed to allow the government time to consider the interaction between this restriction and the design of a potential merger of the two current R&D tax relief schemes for SMEs and large companies, the consultation for which closed last week.
According to the Budget publications, the government is currently considering the responses to this consultation and no decision has been made. However, the government intends to keep open the option of implementing a merged scheme from April 2024 and, despite saying no decision has been taken, said it will publish draft legislation on a merged scheme for technical consultation alongside the publication of the draft Finance Bill in the summer, with a summary of responses to the recent consultation. Any further changes will be announced at a future fiscal event, including a final decision on whether to merge the two schemes.
Last week, Chartered Accountants Ireland responded to the consultation on proposals to merge the SME and large company R&D tax relief schemes into one unified R&D expenditure credit scheme.
Changes were also announced to the UK’s creative sector reliefs. The film, TV, and video games tax reliefs will be reformed and will become expenditure credits instead of additional deductions 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.
Film and high-end TV will be eligible for a credit rate of 34 percent and animation and children’s TV will be eligible for a rate of 39 percent. The new video games expenditure Credit will have a credit rate of 34 percent.
The higher rates of Theatre Tax Relief (“TTR”), Orchestra Tax Relief (“OTR”) and Museums and Galleries Exhibitions Tax Relief (“MGETR”) have been extended by a further two years. Museums and Galleries Exhibitions relief, which was due to expire in March 2024, has been extended until March 2026.
Therefore the headline rates of relief for the TTR and the MGETR will remain at 45 percent (for non-touring productions) and 50 percent (for touring productions). OTR rates will remain at 50 percent. From 1 April 2025, the rates will be 30 percent and 35 percent, and on 1 April 2026 the headline rates of relief for TTR and MGETR will return to 20 percent and 25 percent. The headline rates of relief for OTR will return to 25 percent.
Qualifying expenditure for theatre, orchestra, and museums and galleries exhibition tax reliefs will be changed to ‘expenditure on goods and services that are used or consumed in the UK.’ Productions that have not concluded by 1 April 2024 will be able to continue to claim EEA expenditure until 31 March 2025.
Full details of the reforms, including transitional arrangements, can be found in the response to the consultation on reforms to the audio-visual tax reliefs.
A refocused Investment Zones programme was announced to catalyse 12 “high-potential knowledge intensive” growth clusters across the UK, which will include one in Northern Ireland. Each cluster will aim to drive growth in key future sectors and bring investment to the local area and each investment zone will have “access to interventions worth £80 million over five years, including tax reliefs and grant funding”.
The government has invited local partners in eight areas in England to begin discussions and is working closely with the devolved administrations to establish how these will delivered in Scotland, Wales and Northern Ireland. Further details will be announced in due course.
Tonnage tax regime election window to open
From June 2023, the government will open an election window to permit shipping companies that left the tonnage tax regime to return to the UK. The election window will remain open for 18 months from 1 June 2023 and will enable these companies to take advantage of the reforms to the regime that took effect last year.