Corporation tax rate
Although there had been some speculation that with growth as a main priority of this Budget, the Chancellor would reverse the expected rate increase, there were no changes to previous announcements. As expected, the main rate of corporation tax will now increase from 19% to 25% from 1 April 2023.
Companies with taxable profits up to £50,000 will continue to pay corporation tax at 19%. Profits between £50,000 and £250,000 will be subject to a tapered rate.
With effect from 1 April 2023, a new programme of first-year capital allowances will be available to companies. These allow for:
- 100% first-year relief for main pool plant and machinery expenditure; and
- 50% first-year relief for special rate plant and machinery expenditure.
These reliefs apply for plant and machinery acquired between 1 April 2023 and 31 March 2026, and there is no limit to the amount of expenditure that can qualify.
The reliefs apply in addition to the Annual Investment Allowance (AIA) that allows companies (as well as unincorporated businesses and most partnerships) to claim 100% relief for the first £1 million of qualifying (main or special rate) plant and machinery expenditure per year.
As such, they are only likely to bring an incremental benefit to larger incorporated businesses that incur significant capital expenditure.
Research and Development (R&D) relief
The announcement of a new ‘additional’ R&D tax relief for SMEs makes for an attractive headline but, in reality, there’s nothing ‘additional’ about it – it is just a minor U-turn on measures previously announced.
In his 2022 Autumn Statement, Jeremy Hunt announced changes to the R&D tax relief regime that will restrict the benefit available to SMEs for accounting periods beginning on or after 1 April 2023. In particular:
- The enhanced deduction available to SMEs will be reduced from 130% of qualifying R&D expenditure to just 86%; and
- The rate of payable tax credits for loss-making companies will be reduced from 14.5% to 10% of qualifying R&D expenditure.
Today’s announcement partially reverses the second of these measures by allowing loss-making companies whose qualifying R&D expenditure constitutes at least 40% of their total expenditure to continue to claim payable tax credits at 14.5%. Attempts to access the higher rate of credit through deliberate manipulation will be counteracted by anti-avoidance provisions.
One other piece of welcome news is that the restriction on R&D relief for non-UK expenditure, which was due to take effect from 1 April 2023, has been deferred until 1 April 2024 instead.
The government has recently consulted on wider changes to the R&D tax relief schemes. Their response to that consultation is expected later this year.
Jeremy Hunt’s predecessor, Kwasi Kwarteng, announced in his September 2022 ‘Mini-Budget’ the introduction of new Investment Zones, where tax breaks were to be available to incentivise investment and boost employment in certain designated areas.
The government has now announced plans to designate 12 Investment Zones across the UK, including at least one in Scotland, Wales and Northern Ireland. Special tax sites in or connected with these zones will benefit from a package of time-limited tax reliefs, including beneficial rates of SDLT, capital allowances and National Insurance contributions.
The measures have the potential to incentivise both UK and overseas businesses to establish operations and hire staff in these areas. However, the location of the sites, and the exact programme of tax reliefs, is yet to be confirmed. As such, the attractiveness – and effectiveness – of the proposals remains to be seen.
Certain beneficial tax regimes applicable to investment funds – including Qualifying Asset Holding Companies and Real Estate Investment Trusts – are only intended to apply where the funds are invested in by a number of investors. To achieve this outcome, a Genuine Diversity of Ownership (GDO) condition has to be met.
As drafted, the GDO condition must be applied on an entity-by-entity basis, and so excludes certain investment vehicles even where they form part of a wider fund arrangement that would satisfy the condition if considered as a whole.
The Chancellor has announced measures to widen the scope of the GDO condition so that these funds are not excluded from the applicable regimes. This change will take effect from the date on which the Finance Bill 2023 receives Royal Assent (likely to be in the summer).
Enterprise Management Incentive scheme
The government announced changes to the process of granting options under the Enterprise Management Incentive (EMI) scheme. There are currently fairly onerous requirements for option holders to sign a working time declaration and for details of any restrictions applying to the option shares to be detailed in the option agreement. From 6 April 2023, the requirement to set out the share restrictions and for the company to declare an employee has signed a working time declaration will be removed. It does not remove the working time requirement itself though. This should simplify the process of granting options and remove these areas from being identified as tax risks during a purchaser’s due diligence. The changes apply to EMI share options granted on or after 6 April 2023. Existing EMI share options granted before 6 April 2023 that have not been exercised will also benefit from the changes.
Currently, EMI options must be reported electronically to HMRC within 92 days of the grant date. If the 92-day deadline is missed, then the default position is the options are treated as unapproved share options. This could result in an option holder’s tax liability on an exit being up to 47% (plus 13.8% employer NIC payable by the employer company) rather than 10% or 20% capital gains tax. From April 2024, the government announced it will extend the deadline for the company to notify HMRC of the grant of an EMI option from 92 days to 6 July following the end of the tax year. This brings the EMI grant notification requirements in line with the general reporting date for employment related securities (ERS). We would expect the ERS return will be updated to capture any EMI option grant notifications.
The government also published the responses received to its Call for Evidence on whether and how the EMI rules should be expanded. Many respondents commented on the administrative requirements of an EMI scheme, in particular the process for granting options – the changes noted above were announced in response to these comments. Most respondents believed that the EMI scheme should be expanded to companies with higher gross assets and a larger number of employees, as well as those which currently do not qualify due to the business type or structure. The government previously announced improvements to the tax-advantaged company share option plan (CSOP) which take effect from 6 April 2023, meaning companies which do not qualify for (or have ceased to qualify for) EMI but are also currently prevented from operating a CSOP, may now be able to take advantage of a CSOP.
In addition, the government announced it will be launching a call for evidence on the other tax advantaged share schemes being the Share Incentive Plan (SIP) and Save As You Earn (SAYE). The government will use the call for evidence to consider opportunities to improve and simplify these schemes.
The government will be publishing a consultation document looking at updating PAYE processes specifically looking at tax codes for cases which commonly cause issues, such as starters and leavers and those with multiple employments.