The UK Government has delivered its latest budget, forecasting the direction in which the country is heading economically and detailing what it is doing to help businesses during these tough times. Timothy Jarvis, of Counsel for Gateley Legal, has analysed what was shared in the 2023 Spring Budget from a tax perspective, and how these changes may affect you individually and from a business standpoint.
The UK tax system has been on a wild ride in the last few months. The changes in key personnel in the Government have made it challenging to follow changes in policy. This has been made worse by the trend of Government to preannounce changes in tax policy several months before they take effect. Therefore, when we consider the 2023 Spring Budget, we need to understand what has been announced already at an earlier date as well as what was just announced in order to see the full picture.
Back to the future: what has been announced already?
From 1 April 2023 corporation tax in the UK increases from 19% to 25% on profits over £250,000. Profits up to £50,000 will continue to be taxed at the 19% rate, while companies with profits between £50,000 and £250,000 will be subject to corporation tax at a tapering relief on their profits.
The increase in the corporation tax rate is to be accompanied by the usual plethora of anti-avoidance rules. The thresholds described above will be divided between a company and its associated companies. For example, let’s say that there is a group of two companies, each company will be subject to a £125,000 threshold after which 25% corporation tax becomes payable. It is not the case that each company will be subject to a £250,000 threshold in its own right.
R&D tax credits
In view of the corporation tax increase, companies will be best advised to make sure that they claim all available reliefs.
Companies are eligible to claim R&D tax credits on revenue expenditure on “qualifying R&D”. Under the rules SME companies are given a 130% uplift on revenue expenditure on qualifying R&D with the result that 100 of such revenue expenditure is treated as being 230 for tax purposes. From 1 April 2023 the rate of uplift falls to 86%. Therefore 100 of revenue expenditure on qualifying R&D will be uplifted to 186 for tax purposes from April. This can be set off against the relevant company’s corporation tax bill. Alternatively, SME companies have the choice of cashing in the R&D deduction and uplift for a cash payment from HMRC. Currently the deduction of 100 plus the 130% uplift can be surrendered for a payable credit of 14.5%. From 1 April, the deduction of 100 plus the 86% uplift can be surrendered for a payable credit of 10%. However, the Budget tweaked this rule for R&D intensive companies – see below for details.
Larger companies are not immune from changes. Currently larger companies (i.e. non SMEs) qualify for the RDEC. Until 1 April the RDEC is given at the 13% rate of the relevant company’s qualifying expenditure on R&D. From 1 April the RDEC credit falls to 10% of the company’s qualifying expenditure on R&D.
There are to be some changes to the workings of the R&D tax credit rules, as well as adjustments to the rates. From 1 April research on pure mathematics will be brought within the scope of R&D. Further expenditure on data and cloud computing is to be brought within the scope of qualifying costs. The extent to which R&D tax credits can be claimed on activities to be carried on outside the UK is to be narrowed also. However, see the discussion on this point below.
Annual investment allowance
The annual investment allowance allows corporates and other businesses to claim a 100% capital allowance on the first £1m of capital expenditure made on plant and machinery.
The annual investment allowance had been scheduled to fall to £200,000 from 1 April. However, for companies and businesses acquiring plant and machinery as capital items, the annual allowance is to be kept at £1m. However, as announced in the 2023 Spring Budget, the Chancellor went further on this. See under capital allowances below.
The UK Government has announced that it is signed up to an international tax initiative called Pillar 2. This is targeted at the largest groups which have profits in excess of €750m.
Very broadly speaking, if a company or a group is caught by Pillar 2 then the company/ the group must pay a minimum rate of tax which is at least 15% of accounting profit.
Under Pillar 2 UK companies which hold subsidiaries in low tax jurisdictions may have to pay the top-up tax on behalf of those subsidiaries.
And because of the different ways in which profits are calculated for Pillar 2 tax and for corporation tax it is possible for companies and groups to pay 25% corporation tax and still be obliged to pay the Pillar 2 top-up.
The Government has announced that Pillar 2 will apply to company accounting periods beginning on or after 31 December 2023. However, draft legislation has been produced which is a “gentle reminder” from the Government and HMRC that Pillar 2 tax is on the radar.
There are a number of personal tax measures which take effect from 1 April.
And in particular, the “big freeze” has begun. The basic and the higher income tax thresholds are to be frozen until April 2028. There are also to be freezes in the inheritance tax, national insurance and VAT thresholds too, again until April 2028.
The 45% threshold for income tax is to be cut from £150,000 to £125,140. (It is worth noting that for every £2 earned above £100,000, £1 of the income tax personal allowance of £12,570 is reduced. Therefore, by the time an individual has earnings of £125,140 the income tax personal allowance will be lost too.)
Currently the capital gains tax annual allowance is £12,300. This reduces to £6,000 in April 2023 and again to £3,000 in April 2024.
Individuals have a dividend allowance which is currently set at £2,000. This declines to £1,000 in April and again to £500 in April 2024. There is a further point on dividends to note: in April 2022 the tax bands on dividends were increased by 1.25% per band. Therefore, basic rate taxpayers are now charged to tax on dividends at the 8.75% rate with higher rate taxpayers being charged to tax on dividends at the 33.75% rate with additional rate taxpayers being taxed at the 39.35% rate. With the increases in the corporation tax rate described above, owner-managers will need to consider carefully whether it is better for them to reward themselves via tax deductible bonuses and salaries or whether the payment of non tax deductible dividends and distributions is a more effective method of remuneration.
Share incentives: CSOPs
The grant of EMI options is currently the paradigm solution for share incentives. This is because it enables an option holder’s return to qualify for capital treatment.
However, not every company is able to grant an EMI option, and in the absence of EMI status, option holders may end up with a less tax-efficient package.
The Government has announced reforms to CSOP options which will take effect from 6 April. CSOPs could fill the gap if a company cannot grant EMI options because CSOP options do enable the option holder to qualify for capital treatment. Under the first change the individual limit on shares over which CSOP options can be granted is to be increased from £30,000 to £60,000. Previously the low individual limit acted as a disincentive to the grant of options. Under the second change certain restrictions on the classes of share over which CSOP shares can be granted are to be relaxed. This will enable companies to establish “bespoke” CSOP schemes for their employees.
The Seed EIS Scheme provides tax incentives for individuals investing in certain start-up companies. In brief outline, investors may be able to access a 50% income tax relief on their investment and they may be able to realise their shareholding in the investee company CGT free.
There have been welcome extensions to the relief which take place from 6 April 2023. The amount of money which a company can raise under SEIS increases from £150,000 to £250,000. Further companies within their first three years of trading will be able to access SEIS from 6 April 2023; currently only companies within their first two years of trading are eligible for SEIS funding. From 6 April 2023 companies must have less than £350,000 of gross assets to qualify for EIS; the current cut off limit is £200,000.
In summary, the IR35 rules look at scenarios where individuals contract with client companies via their own personal service companies (PSCs). The IR35 rules analyse whether the relationship between the PSC and the client company is a disguised employment relationship.
If there is a disguised employment relationship, the question is “who pays the PAYE and NIC?”
There are in fact two answers to this question. If the end user client is “small” the obligation falls on the PSC. To determine if a person is “small” the definition in the Companies Act 2006 must be applied. In other circumstances, the PAYE and NICs obligation will fall on the end user client or the person closest to the PSC in the supply chain where the PSC’s services are supplied via chain of employment agencies.
The Government also previously announced an extension of the SDLT nil rate band for residential property to £250,000 and an extension of first-time buyers’ relief by which the first £425,000 of purchase price is subject to 0% SDLT with the tranche from £425,001 to £625,000 being subject to 5% SDLT. These changes are subject to a preannounced sunset clause under which they will expire from 31 March 2025.
So, what happened on the day?
The Chancellor announced an extension of the capital allowances rules in the Budget. It is costed at £9bn a tax year.
Capital allowances give tax relief for capital expenditure on items of plant and machinery. Currently, to the extent to which the expenditure can qualify for the £1m annual investment allowance described above, capital allowances are given at the 100% rate. Once the annual allowance is exceeded, capital allowances are given on either an 18% or a 6% reducing balance basis depending upon the nature of the plant and machinery. This can result in significant delays in the expenditure being deducted for tax purposes.
The Chancellor has announced a reform of the capital allowances rules. For the next three years companies will be able to claim 100% capital allowances on the plant and machinery expenditure which would otherwise have qualified for capital allowances at the 18% rate. Similarly, for the next three years companies will be able to claim a first year 50% capital allowances on the plant and machinery expenditure which would otherwise have qualified for capital allowances at the 6% rate. The Chancellor said that his intention was to make this cut permanent.
Therefore, a company buying plant and machinery for say £1m will be able to generate a £250,000 tax saving on account of the 25% corporation tax rate.
However, it is not a complete give away. Exclusions will apply, most notably the exclusions of expenditure on cars, and plant and machinery for leasing except where it is under an excluded lease of background plant or machinery for a building. Expenditure must be incurred by a company within the charge to corporation tax and the plant or machinery must be unused and not second-hand.
Separately disposals of plant or machinery for which full expensing or a 50% first-year allowance has been claimed will be subject to immediate balancing charges. These balancing charges will be equal to 100% of the disposal value in the case of full expensing and 50% of the disposal value in the case of the 50% first-year allowance. The amount of balancing charge will be reduced proportionately if an allowance is claimed in respect of only part of the expenditure.
R&D tax credits: for R&D intensive SMEs
As discussed above, from 1 April SME companies can surrender their R&D revenue deductions plus the 86% uplift for a payable credit of 10%. In other words, if an SME incurs 100 of revenue expenditure on R&D then such expenditure can be surrendered for a payment of 18.6.
However, the rate of payable credit for such companies increases to 14.5%. Say that an R&D intensive SME incurs 100 of expenditure on revenue R&D. The 100 of expenditure plus the 86 uplift can be surrendered for a 14.5% credit. This makes a payable credit of 26.97. And not the 27 which the Chancellor said in the budget.
Separately, last year the Chancellor had announced that the extent to which R&D tax credits could be claimed for activities carried out outside the UK would be narrowed. This change is still going ahead. However, the start date is to be pushed back from April 2023 to April 2024.
Pensions: allowances increased
The annual allowance was increased from £40,000 to £60,000. This is the amount of tax-deductible pensions savings which an individual can make in the tax year. The lifetime allowance is currently £1.07m. The lifetime allowance is the pot which an individual can accumulate without incurring top-up charges. The good news is that it is to be eliminated entirely. The tax-free lump sum which can be withdrawn from a pension pot is to be capped at its current level of £268,275 going forwards.
This is self-evidently good news for pension savers. However, there are also some knock-on opportunities. Employers may wish to consider salary sacrifice arrangements by which individuals can sacrifice salary for enhanced employer pension contributions. These arrangements, if structured correctly, can result in substantial national insurance savings for the employer company. Pension contributions may be useful in the context of employment settlements too. Depending on the precise fact pattern, it may be possible for an employee to receive a pension contribution instead of receiving settlement monies which would otherwise be subject to income tax.
EMI options: some changes
EMI options are the ideal employee incentive as they secure capital treatment for the option holder.
However, the implementation of the options can be tricky and on occasions the options are disqualified because of a failure to comply with procedural requirements. This often becomes an issue on corporate DD.
From 6 April 2023 the requirement for the option grant agreement to set out the restrictions to which the option shares will be subject will be removed. Similarly, from 6 April 2023 the requirement for an employee to sign a working time declaration when the option agreement is entered into will be removed.
At the time of writing, it is not clear if this will apply to all EMI options or only to EMI options granted from 6 April onwards.
Going forward, the Chancellor announced a change which will take effect from 6 April 2024. Currently EMI options must be notified to HMRC within 92 days of grant in order to qualify for the tax benefits. This notification will be relaxed so that the longstop date will become 6 July in the tax year which followed the tax year in which the option grant occurred.
Taxation of fund structures
There have been some changes proposed to the taxation of REITs. In particular, the changes will remove the requirement for a REIT to hold a minimum of three properties where it holds a single commercial property worth at least £20m; amend the rule that deems a disposal of property within three years of being significantly developed as being outside the property rental business so that the valuation used when calculating what constitutes a significant development better reflects increases in property values; and amend the rules for deduction of tax from property income distributions paid to partnerships to allow a property income distribution to be paid partly gross and partly with tax withheld.
A key pre-condition for many fund structures to qualify for tax privileges is that the fund structure satisfies the Genuine Diversity of Ownership (GDO) condition. Under current law, the GDO condition must be applied to each entity within a fund structure in isolation. This can mean that a particular entity does not satisfy the GDO condition, even though it forms part of a wider arrangement which, taken as a whole, would meet the relevant requirements. The changes being made by this measure provide that, for the purposes of the QAHC, REIT and NRCG rules, where an entity forms part of multi-vehicle arrangements, the GDO condition can be treated as satisfied by the entity if it is met in relation to the multi-vehicle arrangements. The definition of multi-vehicle arrangements encompasses a group of entities which form part of a wider fund structure where an investor would reasonably regard their investment to be in the structure as a whole. This is significant because many fund structures use a series of parallel funds to cater for the different tax and regulatory needs of their investors.
In addition, a series of tidying up amendments have been proposed to the QAHC rules to make sure that they work as intended.
The Chancellor announced 12 investment zones, which will each receive £80m in funding over five years, including tax reliefs. The intention is to partner with the university sector.
Investment zones have been announced in the West Midlands, Greater Manchester, the North East, South Yorkshire, West Yorkshire, East Midlands, Teesside and Liverpool. The intention is that there will be at least one investment zone in each of Northern Ireland, Scotland and Wales.
Something technical on CGT
This measure will have effect in relation to assets disposed of and acquired under an unconditional contract entered into, on, or after 1 April 2023 for companies and 6 April 2023 for individuals, trustees and personal representatives of estates.
Section 28(1) of the Taxation of Chargeable Gains Act (TCGA) 1992 prescribes the time of disposal and acquisition of an asset disposed of and acquired under an unconditional contract.
Section 7 of the Taxes Management Act (TMA) 1970 and paragraph 2 of Schedule 18 to the Finance Act (FA) 1998 concern, respectively, the giving to HMRC of notice of chargeability to income tax and CGT and to corporation tax.
TMA 1970, sections 34 and 36 and FA 1998, Schedule 18, paragraph 46 concern time limits for assessments.
TMA 1970, section 43 and FA 1998, Schedule 18, paragraph 55 concern time limits for making claims.
Legislation to be introduced in Finance Bill 2023 will insert a new section 28A into TCGA 1992. This will modify the application of TMA 1970 sections 7, 34, 36 and 43 of and FA 1998, Schedule 18, paragraphs 2, 46 and 55 so that the relevant notification periods and assessment and claim time limits operate by reference to the tax year or accounting period when an asset is conveyed or transferred rather than the tax year or period in which the contract for the disposal was made.
These modifications will apply for CGT where the conveyance or transfer of an asset takes place after the date six months after the end of the tax year in which the disposal is treated as taking place; and for corporation tax the date one year after the end of the accounting period for the disposal.