Earlier today, Chancellor Jeremy Hunt delivered his second major fiscal statement in five months. With the OBR forecasting that the UK will not enter a technical recession this year (albeit it still expects a contraction of 0.2% in the economy) and that inflation will fall below 3% by the end of 2023, the Chancellor felt justified in saying that the UK economy was on the right track.
In terms of specific policies, as is becoming the norm, the headline announcements have been trailed in advance over the last few days. The main focus this year was on expanding free childcare provision – while the key announcements applied to England, they should lead to increased funding for Northern Ireland via the Barnett formula.
Pensions Tax Relief
The main personal tax-related announcement in this Budget was probably the changes to the pension annual and lifetime allowances. The annual allowance (the amount which can be contributed to pension schemes tax-free each year) will increase from £40,000 to £60,000 from 6 April 2023. The three year carry-forward of unused annual allowances is retained.
The lifetime allowance charge (currently applicable to pension pots in excess of £1,073,100) will be removed from April 2023, with the lifetime allowance being abolished from April 2024. However, the maximum tax-free lump sum that can be taken from pensions at commencement will be retained and frozen at its current level of £268,275 (i.e. 25% of the current lifetime allowance).
The Chancellor committed to making the UK tax system one of the most competitive in the world. He introduced two major capital allowances designed to boost investment.
Full Expensing (“FE”) will allow companies incurring expenditure on capital allowance main rate pool assets to claim a 100% deduction for the cost of the assets from their profits. This FE will apply from 1 April 2023 to 31 March 2026 and will result in a tax saving of 25p per £1 spent.
In addition, the 50% First Year Allowance (FYA) which is available on plant and machinery which qualify as special rate assets has been extended until 31 March 2026. For each year following the FYA claim, the remaining expenditure will continue to be written off at 6% per annum.
The Chancellor’s long-term commitment is to make both these reliefs permanent. However, while the £1m Annual Investment Allowance currently remains in place indefinitely, we consider that the new relief will be of limited benefit to most small or medium-sized businesses.
Research & Development
In the Autumn Statement 2022, the government announced that from 1 April 2023 the rate of the Research & Development Expenditure Credit (RDEC) for large companies would be increased from 13% to 20%.
At the same time a reduction in the Enhanced Expenditure Relief for Small and Medium size Enterprises (SMEs) was announced, with the enhanced deduction for qualifying expenditure reduced from 130% to 86% from 1 April 2023 and the payable credit for loss making companies cut to 10% from 14.5% from the same date.
These changes announced in the Autumn Statement will still come into effect on 1 April 2023. However, today the Chancellor has announced an increased rate of relief for loss-making R&D intensive SMEs. SME companies for which qualifying R&D expenditure constitutes at least 40% of total expenditure will be able to claim a higher payable credit rate of 14.5% for qualifying R&D expenditure (resulting in £27 from HMRC for every £100 of R&D expenditure.)
The implementation of overseas expenditure restrictions has been delayed for one year and will now come into effect on 1st April 2024. This is to allow the government time to consider the impact of this restriction on a single merged R&D relief. The consultation on merging the R&D Expenditure Credit (RDEC) and SME schemes closed on 13 March and draft legislation on a merged scheme is expected to be published this summer for technical consultation.
The Budget was noticeably light on mentions of income tax, national insurance contributions and tax-free allowances –primarily because tax thresholds and allowances have been frozen until 2027/28.
However, one other point of note for SMEs was the announcement of a relaxation of administration rules for Enterprise Management Incentive Schemes. From April 2023, there will no longer be a requirement for option agreements to include details of share restrictions, nor for a company to declare that an employee has signed a working time declaration. From April 2024, the deadline for notification of the option grant will be changed from 92 days following grant, to the 6 July following the end of the tax year in which the grant took place.
If you would like to discuss any of the above matters (or any other tax related issues) in more detail, please contact any member of our Tax team.