Today’s Spring Budget announcement by Chancellor Jeremy Hunt had an overarching theme of supporting people and businesses to get ‘back to work’, whilst setting out their vision to ensure that the UK’s tax system fosters the right conditions for enterprise. Did it live up to this promise? We’ve broken down what was stated and the implications these changes could have for you and your business.
Corporation tax on profits over £250,000 will rise from 19% to 25% in April. Hunt said: “Only 10% of companies will pay the full 25% rate. But even at 19% our corporation tax regime did not incentivise investment as effectively as countries with higher headline rates.”
To offset the rise in the main rate of corporation tax, the Treasury is looking to encourage investment and promote productivity. The Annual Investment Allowance had previously been kept at £1m, meaning 99% of all businesses can deduct the full value of all their investment from that year’s taxable profits, according to the Chancellor.
He is now introducing “full expensing” for the next three years, with an intention to make it permanent ‘as soon as we can responsibly do so’. Every single pound a company invests in IT equipment, plant or machinery can be deducted in full and immediately from taxable profits.
This regime will replace the “super-deduction” from 1 April, which currently allows companies to claim 130% Capital Allowances on investments in plant and machinery.
(The 50% First Year Allowance for special rate assets is also being extended for three years).
The changes to Capital Allowances also effectively restrict RDAs (R&D capital allowances) just to buildings.
Following the cut to the SME rates previously announced in Autumn 2022, there will be targeted support to loss-making research-intensive SMEs (such as high tech sectors like fintech and AI). A company is considered R&D intensive where its qualifying R&D expenditure is worth 40% or more of its total expenditure. Eligible loss-making companies will be able to claim £27 from HMRC for every £100 of R&D investment, instead of £18.60 for non R&D intensive loss makers.
The additional relief uplift is still 86% (reduced from 130% as previously announced), but the tax credit rate for qualifying companies is 14.5% (not the reduced 10% previously announced, that applies to all other SMEs). This change is for claims from 1 August 2023 and an updated claim form will be made available.
Hunt called this a £1.8bn package of support helping 20,000 cutting-edge companies turning Britain “into a science superpower”. This will support the development of AI, machine learning and other digital based technologies.
Mark Tighe, CEO of innovation funding specialist Catax, a Ryan company, said:
“By announcing that only loss-making SMEs spending 40% of their expenditure on R&D can benefit from a new higher level of tax credit, the Government is admitting that it cannot aspire to be a science and technological superpower while it disincentivises companies from innovating.
“These changes will not reset the impact that upcoming cuts to SME R&D tax relief will have on smaller innovating companies. However, it will reward some of those companies that have R&D at the heart of their business models and allow them to keep investing in innovation.
“The bigger picture is that the Government still intends to streamline the R&D scheme into a single, simplified scheme for all companies regardless of size from April 2024.
“If the Government wants to protect growth in R&D spending, it must be careful not to deter SMEs from taking on the financial commitments that make innovation possible.
“Innovating companies are the ones taking the biggest risks, but they are also the ones that offer the biggest hope of building the UK’s technological future and growing GDP.”
The government is continuing to consider merging the SME R&D scheme with the credit scheme for large companies (RDEC) from 1 April 2024, and consequently the restriction of reliefs for overseas activity is to be delayed by a year until 1 April 2024.
Businesses operating within areas including the West Midlands, Greater Manchester, the North East, South Yorkshire, West Yorkshire, East Midlands, Teesside and Liverpool, as well as at least one zone in Scotland, Wales and Northern Ireland, will benefit from enhanced tax relief and lighter touch regulations. Hunt said the location of these investment zones must show a partnership “between local government and a university or research institute in a way that catalyses new innovation clusters”.
The Chancellor announced an “AI sandbox” to increase support for the UK’s artificial intelligence (AI) companies. A quantum strategy with a research and innovation programme, worth £2.5b, was also unveiled.
To discuss how Catax (a Ryan company) can support your business with the upcoming changes to R&D tax relief and Capital Allowances, please call 0300 303 1903, email firstname.lastname@example.org or fill in the enquiry form below and one of our experts will be in touch soon.
*Image: Richard Townshend, CC BY 3.0 <https://creativecommons.org/licenses/by/3.0>, via Wikimedia Commons