The merger of the SME and large company research and development (“R&D”) tax relief schemes, and the making permanent of full expensing for businesses were the main changes to business taxes.
Merger of R&D tax relief schemes
Continuing with the theme of reform to the UK’s R&D tax relief regimes which began in the 2022 Autumn Statement, the SME and large company regimes are to be merged, as planned, from 1 April 2024. However, the Chancellor did not specify the rate(s) of relief which will be available under the merged scheme, which is likely to be announced in the 2024 Spring Budget.
The merged scheme will offer a taxable R&D expenditure credit, based on a percentage of R&D expenditure, that will be able to be offset against a company’s tax liability or, subject to some adjustments, be paid in cash to the business via a payable tax credit.
In our submission to the House of Lords Finance Bill Sub-Committee inquiry into draft Finance Bill 2023/24, Chartered Accountants Ireland recommended that the commencement date for the introduction of a single unified scheme be deferred beyond 2024 to allow for a longer period of consultation to be undertaken on the potential options available.
It was also announced by the Chancellor last week that under the merged R&D scheme, payments of the merged scheme payable tax credit to loss making companies will be reduced via a notional tax. The aim of this is to ensure that the overall tax benefit is similar to that available to profit making companies.
This will be done by calculating the net amount at Step 2 using the rate applicable to the taxpayer (either the small profits rate (“SPR”), currently 19 percent, or the main rate (25 percent)), by applying the SPR to loss making companies. Companies will also be able to off-set the amount withheld against tax in future years.
According to the publications, this change in the rules for the merged scheme is designed to ensure that loss making companies receive more cash benefit upfront, compared to the position set out in the July policy paper.
The intensity threshold in the R&D intensives scheme is to be reduced from 40 percent to 30 percent for accounting periods that commence on or after 1 April 2024. A one-year grace period will also be introduced which will allow companies who dip under the 30 percent threshold to continue to receive relief as an R&D intensive company for a further year.
More details of the changes to R&D tax relief are available in a HM Treasury policy paper with confirmation that all changes come into effect in respect of accounting periods beginning on or after 1 April 2024.
R&D tax reliefs - removing nominations and voiding assignments
From 1 April 2024, R&D claimants will no longer be able to nominate a third-party payee for R&D tax credit payments, subject to limited exceptions. In addition, from 22 November 2023. no new assignments of R&D tax credits are possible. This means that in most circumstances payments of R&D tax credit claims will be paid directly to the company in order to ensure that they “have full oversight of the claim and receive payment more quickly”. This will be legislated for in the Autumn Finance Bill 2023.
Closure of the R&D review
At Spring Budget 2021, the Government launched a review of R&D tax reliefs. The Government is now concluding that review with the announcement of the merged scheme.
The Autumn Statement publications do refer to the potential that further action may be needed to tackle high levels of non-compliance in R&D tax reliefs, hence it is expected that HMRC will be publishing a compliance action plan in due course.
The Government will also continue working with industry to develop the enhanced support for R&D intensive SMEs and will also consider if further simplifications can be implemented.
Full expensing for companies
Full expensing was announced in the 2023 Spring Budget and replaced the 130 percent super deduction which came to an end on 31 March 2023. The relief is only available to companies incurring expenditure on new plant and machinery (with some exclusions) and was originally scheduled to last for a three-year period until 31 March 2026.
The Chancellor announced last week that full expensing is being made permanent. Although this was badged as the biggest tax cut in modern British history, in reality it is only of real benefit to larger companies who have the capacity to invest in more than their annual investment allowance limit, which already provides 100 percent relief for such assets, up to a maximum of £1 million. The Office for Budget Responsibility expects this to increase business investment by £3 billion per year.
At present, assets for leasing remain excluded from full expensing. However, the Government is to continue to consider whether there is a case to extend full expensing to leasing hence a technical consultation will be published in due course to seek input on draft legislation which will also consider whether error and abuse risks can be appropriately mitigated.
A technical consultation is also expected to be launched on wider changes to simplify the UK’s capital allowances legislation.
Tax relief for training costs
HMRC is also to rewrite guidance around the tax deductibility of training costs for sole traders and the self-employed. This aims to ensure that taxpayers can be confident that updating existing skills or maintaining pace with technological advances or changes in industry practices, are allowable costs for tax purposes.
Creative sector tax reliefs
The Government expects further growth and a rise in employment as creative industries embrace new technologies. To maximise the benefits of this, the Government will further boost the international competitiveness of tax incentives for the UK’s world-leading visual effects sector by increasing the generosity of the audio-visual expenditure credit for visual effects expenditure. Work will begin with industry on how best to design this with the intention of implementing changes to the tax relief from April 2025.
As part of this, the Government has published a call for evidence on recent trends in the visual effects industry. This aims to inform the design of additional tax relief for expenditure on visual effects, which the Government intends to deliver via the audio-visual expenditure credit. The Government intends to consult on the detailed policy design of further support and intends to implement changes to this expenditure credit from April 2025.
As previously announced, animated feature film will be eligible for a 5 percent uplift in relief under the audio-visual expenditure credit.
The Government has also amended the proposed definition of a documentary. The new definition is designed to align with the guidance used by the British Film Institute and will apply to the audio-visual expenditure credit, which will be legislated for in the Autumn Finance Bill 2023.
The proposal to cap the relief that companies can receive on connected party transactions is also being amended. Companies will now be required to disclose connected party transactions and charge connected parties at an arm’s length price. This will also be legislated in the Autumn Finance Bill 2023.
Simplification for smaller businesses
As announced in Spring 2023, the Government is undertaking a systematic review of guidance and key forms for small business and has already begun to implement some improvements including enhanced guidance when checking if you need to submit a self-assessment tax return, new interactive guidance to help businesses register for self-assessment, and improved guidance designed to make it easier to report VAT errors.
Following a consultation at Spring Budget 2023, the Government is expanding the cash basis for unincorporated businesses. These changes will take effect from 6 April 2024, for 2024/25 and will be included in the Autumn Finance Bill 2023. More details are set out in a policy paper which confirms that the cash basis will be the default method of calculating the tax adjusted trading result, meaning an election will no longer be required. Hence all unincorporated businesses will use the cash basis unless they make an election to use the accruals basis instead.
Currently, businesses are only able to join the cash basis if their turnover is less than £150,000, and they are forced to leave in certain circumstances, including where turnover exceeds £300,000. The turnover restriction will be removed entirely from 6 April 2024.
Chartered Accountants Ireland responded earlier this year to this consultation and supported the expansion of the cash basis but recommended that business should have a choice and be able to choose which basis best suits them hence it is pleasing to see that the Government have taken this on board and will allow businesses to opt out of the default cash basis.
Oil and gas fiscal regime
Alongside confirming that the Energy Profits Levy (“EPL”) will end no later than 31 March 2028, the Government published the conclusion to the review of the oil and gas fiscal regime in a collection of documents which sets out an oil and gas fiscal regime package covering the short, medium, and longer term.
This includes setting out principles for the tax treatment of future oil and gas price shocks after the end of EPL and targeted support for the energy transition through allowing relief for payments made by oil and gas companies into decommissioning funds in relation to oil and gas assets that are repurposed for certain uses. Legislation will also remove the receipts from the sale of these assets from the EPL.
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