Business taxes

15 March 2023

As anticipated, Mr Hunt did not announce a reversal of the increase to the main rate of corporation tax to 25% from 1 April 2023, despite reported pressure from fellow Conservative MPs. The key tax announcements in relation to the ‘enterprise’ pillar of his four-pillar industrial strategy, were in relation to capital allowances, research and development (R&D) tax reliefs and creative industry tax reliefs. Only time will tell if these measures will enable the chancellor’s strategy to deliver long-term sustainable growth.

Investment zones

 Following the perceived success of freeports, the government is launching a programme to catalyse new innovation clusters in designated investment zones. The 12 new investment zones will be spread across the UK and are targeted at driving growth in one of the UK’s ‘key future sectors’ – green industries, digital technologies, life sciences, creative industries and advanced manufacturing.

Over five years, businesses located within investment zones will have access to tax benefits, including enhanced rates of plant and machinery capital allowances and structures and buildings allowances, coupled with relief from stamp duty land tax (SDLT), business rates and employers' National Insurance contributions.

Tonnage tax

An election window will be opened, allowing shipping companies that previously left the tonnage tax regime to return to the UK. This regime is an alternative method of calculating corporation tax profits by reference to the net tonnage of the ship operated. Companies that operate qualifying ships that are ‘strategically and commercially managed in the UK’ and are within the UK corporation tax regime can take advantage of the regime. However, it is important to note that all qualifying members of a group must enter into the regime together.

The new election window will open for 18 months from 1 June 2023, enabling shipping companies to make use of earlier reforms to the regime announced last year. Third party ship management companies will also be able to take advantage of the regime, and the limit on capital allowances for lessors of ships within the regime will be raised to £200m.

Corporate interest restriction (CIR)

UK companies and groups that incur more than £2m of net interest expense and other financing costs per annum may be denied deductions for such expenses under the CIR rules. Technical changes to this regime will be introduced to avoid unfair outcomes and ensure the rules are operating as intended.

The revisions will mostly take effect for accounting periods commencing on or after 1 April 2023, and will include (amongst others) amendments to:

  • ensure that groups can carry forward interest allowance where a new holding company is inserted in the group part way through a period of account;
  • remove an anomaly that can arise in relation to income or expenses deriving from a money debt that is not a loan relationship;
  • extend the time limit for HMRC to appoint a reporting company by 12 months; and
  • require groups to submit a revised interest restriction return where the underlying figures have changed, and give HMRC the power to issue penalties if such a return is not submitted.

With high inflation in the economy and the cost of debt rising, many more UK companies and groups will be pulled into the CIR regime and, consequently, potentially affected by the changes announced in Mr Hunt’s Budget statement.

Limitations on the access to double tax relief

In July 2022, the government announced that legislation would be introduced to restrict certain claims for double tax relief. The Spring Budget confirms the introduction of rules to prevent certain claims that could otherwise arise in relation to overseas dividends received by UK companies in periods prior to 2009. 

These rules are only intended to target new claims for long-settled periods where no actual additional tax has been paid. They will not prevent claims in relation to open periods or periods that remain subject to ongoing litigation. They are likely be relevant only to a very small number of companies.   

Transfer pricing documentation

As previously announced, for accounting periods beginning on or after 1 April 2023, businesses operating in the UK that are part of a large multinational enterprise (those with global revenues of €750 million or more), will be required to prepare transfer pricing documentation in the form of a master file and a local file, in accordance with the Organisation for Economic Cooperation and Development (OECD) transfer pricing guidelines.

HMRC will also continue to consult on the introduction of a requirement to prepare and maintain a summary audit trail detailing the steps undertaken by UK businesses in preparing their transfer pricing documentation. Affected companies should consider their current transfer pricing documentation and take appropriate action, if they have not already done so.

Multinational top-up tax and domestic top-up tax

As previously announced, the government will legislate to implement the globally agreed multinational top-up tax (under ‘Pillar Two’ of the G20-OECD international tax reforms to address the globalisation and digitalisation of the economy) in the UK for accounting periods beginning on or after 31 December 2023. This will require large UK headquartered multinational groups to pay a top-up tax where their operations in another tax jurisdiction have an effective tax rate of less than 15%. A supplementary domestic top-up tax will also be introduced, applying where the UK operations of a company or group have an effective tax rate of less than 15%. Both of these measures will apply to enterprises with global revenues of €750 million or more.

Expanding the cash basis for the self employed

The government has opened a consultation, requesting ideas on ways to expand the cash basis regime for the self-employed. The cash basis is intended to simplify the way in which sole-traders calculate their taxable profits for income tax purposes, and the government wants to ensure that as many small businesses as possible can benefit from this simplified system. The consultation focuses on:

  • increasing the turnover thresholds for businesses to use the cash basis regime;
  • setting the cash basis as the default, with an opt-out election for those who would like to use the accruals system;
  • increasing the £500 limit on interest deductions for those businesses using the cash basis; and
  • relaxing restrictions on loss relief for those using the cash basis.

Given the announcement in Kwasi Kwarteng’s ‘mini-Budget’ in September 2022 that the Office of Tax Simplification would be closed – a decision that Mr Hunt has not reversed – it is interesting that the government is now considering expanding a regime which aims to simplify the tax affairs of a significant proportion of taxpayers.

Innovation incentives

It is rare that a Budget is delivered without the chancellor of the day seeking to fine-tune the UK’s innovation and creative sector reliefs to increase productivity, growth or value for money. For those of us who work in this area of tax, Budget day is therefore normally a busy one. However, even in this context, the 2023 Spring Budget contained a bumper crop of changes affecting innovative and creative businesses, which we outline below.

Research and development tax reliefs

Before going into detail on the research and development (R&D) tax relief changes announced, it is helpful to recap the background. There are currently two schemes of relief, one designed for small and medium-sized enterprises (SMEs) and consisting of an additional tax deduction combined with a payable credit for loss-makers, and one designed for larger companies and consisting of an R&D expenditure credit (RDEC) recognised for accounting purposes as an item of profit before tax. Whilst the government has always been committed to retaining a tax relief for companies carrying out R&D activities, it has recently been looking at ways to modernise the reliefs and protect against abuse, which is thought to be particularly prevalent in relation to the SME scheme. Certain technical changes that will affect both regimes have been in the process of being adopted for several years, before the chancellor announced in the Autumn Statement that the rates of relief under the SME scheme would be slashed, and the government would consult on merging the two existing schemes into one RDEC-like relief.

The SME scheme - Following the 2022 Autumn Statement, legislation has been enacted to ensure that, from 1 April 2023, the enhanced tax deduction available to SMEs in respect of qualifying R&D expenditure will decrease from 130% to 86%, and the payable credit for loss-making SMEs generally will be cut from 14.5% to 10%. As a consequence, once the increase in the main rate of corporation tax to 25% from 1 April 2023 is taken into account, the SME R&D tax relief will be worth 21.5p for every £1 of qualifying expenditure to profitable companies, down from 24.7p currently, whilst the cash benefit falls from 33.35p to 18.6p per £1 for loss-making businesses.

Understandably, many small businesses that carry out substantial R&D activities have expressed concern at the scale of this cut in support, and the chancellor has responded with a measure intended to help ensure that appropriate incentives for innovation remain available to SMEs. The Budget confirms that, from 1 April 2023, a higher rate of payable credit will be available for loss-making SMEs that are ‘R&D intensive’. Consequently, SME companies with qualifying R&D expenditure constituting at least 40% of their total expenditure will be able to obtain a payable credit of 14.5% of the losses surrendered, rather than the normal rate of 10%. Therefore, the net benefit they obtain will be 26.97p per £1 of qualifying expenditure – still less than it was prior to 1 April 2023, but not as dramatically so.

The consultation on a single scheme - In November 2022, the government announced that it will consult more widely to ensure that the R&D tax reliefs remain effective and competitive, and in January 2023 it launched a consultation on merging the two existing schemes. The consultation closed earlier this week (13 March) – the government is currently considering the responses and no decision has been made. It intends to keep open the option of implementing a merged scheme from 1 April 2024 and, if it decides to proceed, will publish draft legislation for technical consultation in the summer.

Technical changes - As previously announced, the R&D tax reliefs will be reformed for accounting periods beginning on or after 1 April 2023 by expanding the scope of qualifying expenditure to include data and cloud computing costs and implementing measures to target abuse and improve compliance. However, the intended restriction on most expenditure on sub-contractors or externally provided workers located outside the UK will now come into effect a year later, for accounting periods beginning on or after 1 April 2024. This will allow the government to consider the interaction between this restriction and the design of a potential merger of the two R&D regimes.

To tackle the widespread abuse of R&D tax reliefs, the government has brought forward a requirement for an additional information return, a new digital submission (via a web-based form) which must be provided in support of all claims made on or after 1 August 2023. This form represents a significant new administrative burden for claimants, requiring them to provide specific information about the company’s R&D activities, the costs incurred, the identity of any agent that has advised on the claim, and the employee or officer of the company that is responsible for it.

Creative sector tax reliefs

The chancellor’s Budget statement acknowledged the important role that the creative sectors play in the UK economy. For the audio-visual reliefs (comprising reliefs for the development of video games, films, high-end TV programmes, children’s TV programmes and animations), we welcome the move to an expenditure credit regime, which will encourage investment and address concerns surrounding the forthcoming global minimum tax rules. For video games tax relief specifically, the removal of the subcontracting limit of £1m per game is a welcome change, and whilst it was widely expected the relief would be reformed to ensure that only UK expenditure qualifies (as is the case for the other audio-visual reliefs) the ability to continue to claim in respect of European Economic Area expenditure up until 31 March 2027 should give claimants time to consider restructuring their operations, where it is appropriate to do so. For all the audio-visual reliefs, the overall cash benefit per £1 of qualifying expenditure will remain similar at broadly 20p, although for animations and children’s TV the benefit will now increase to just over 23p. We look forward to reviewing draft legislation to implement these changes when it is published in the summer of 2023.

As regards the other creative sector reliefs targeting the cultural and charitable sectors (theatres, orchestras, museums, and galleries), the current generous rates of relief were due to reduce from 1 April 2023. However, the government has now confirmed that the headline rates will remain at 45% for non-touring, and 50% for touring, theatrical productions, and exhibitions until 1 April 2025. For orchestras, the rate will remain at 50% until 1 April 2025. In addition, museums and galleries exhibitions tax relief has been extended until 31 March 2026. These changes will be very welcome as many organisations in these sectors are still struggling to return to pre-pandemic revenues. 

Patent box

The patent box regime provides for an effective corporation tax rate of 10% on profits attributable to qualifying intellectual property rights, typically patents. Whilst there were no major changes to this regime announced in the Budget, the introduction of a small profits rate of corporation tax from 1 April 2023 necessitates an amendment to link the patent box deduction to the applicable rate of corporate tax, thus ensuring that all companies still receive the effective 10% corporation tax rate on patent box profits, regardless of their overall profitability.

Capital allowances

The announcement of full expensing for qualifying general pool plant and machinery and an extension of the 50% allowance for special rate assets in the chancellor’s Spring Budget statement is a big boost to UK companies facing the end of the super-deduction scheme on 31 March 2023 and the corporation tax rate rise from 19% to 25% from 1 April 2023.

The full expensing regime will commence for expenditure incurred by companies from 1 April 2023 and will apply for three years, at an estimated maximum annual cost of £11bn. The government hopes this announcement will encourage capital investment in the UK, which it acknowledges is currently at a level below that observed in comparable countries.

The new full expensing regime will see UK companies receive 25p of tax relief for every £1 of qualifying capital expenditure on new and unused plan and machinery, and importantly the relief is uncapped. This will ensure that the tax relief available from 1 April 2023 is at a similar level to the current super-deduction regime.

We welcome the chancellor’s intention to make these incentives permanent ‘as soon as it is sustainable to do so’; however, we note that the next general election is due to take place before the expiry of this incentive, meaning businesses continue to face a degree of uncertainty about the future tax landscape for investment in the UK.

Whilst it is good that the relief is proposed to remain in place for longer than the two-year super-deduction scheme, three years is still a narrow window for businesses to complete any new investment plans, given well publicised challenges with global supply chains.