Chair of Staffordshire Chambers’ Money Matters Forum Chris Alderman, who is Tax Director at RSM’s Stoke-on-Trent office, provides an expert breakdown of the key announcements in the Spring Budget.
Business taxes
Corporation tax rate – as expected, there was no reversal of the 25% main rate of corporation tax being introduced from 1 April 2023.
Capital allowances – from 1 April 2023 to 31 March 2026, investments made by companies in qualifying plant and machinery will qualify for full expensing relief, i.e. a 100% first year allowance for most assets. So-called ‘special rate’ assets, such as integral features of buildings and those with a useful life of more than 25 years, will qualify for a 50% first-year allowance for the same period. The annual investment allowance limit will continue permanently at £1m per annum. Companies should also be able to utilise the annual investment allowance to obtain full relief in the year of acquisition for up to £1m of expenditure on special rate and/or second hand assets. Mr Hunt also announced an intention to make these reliefs permanent as soon as the government can responsibly do so.
Research and development (R&D) intensive small and medium-sized enterprises (SMEs) – following changes set out at the Autumn Statement, from 1 April 2023, the enhanced deduction available to SMEs generally in respect of qualifying R&D expenditure reduces from 130% to 86%, and the payable credit they can claim in respect of consequential losses reduces from 14.5% to 10%. However, the chancellor today announced that loss-making SMEs that are R&D intensive (i.e. those whose qualifying R&D expenditure constitutes 40% or more of their total expenditure) will continue to be able to claim a payable credit of 14.5%. For such businesses, the effective net benefit of the R&D tax relief for SMEs will reduce from its current level of 33.35% to 26.97% on 1 April, rather than all the way down to 18.6%.
R&D tax reliefs review – the consultation on merging the R&D expenditure credit (RDEC) and SME schemes has closed. The government intends on publishing draft legislation for technical consultation on a merged scheme in summer 2023.
Restriction on overseas expenditure in R&D tax reliefs – as a result of the above review, the previously announced restriction on R&D tax relief in respect of most expenditure on sub-contractors or externally provided workers located outside the UK is being delayed by 12 months until 1 April 2024.
Additional information form for R&D claims – from 1 August 2023, all R&D claims must be accompanied by an additional information form submitted online, including 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.
Investment zones – the government will establish 12 Investment Zones across the UK. Once designated, the investment zone tax sites will benefit from a five-year package of tax reliefs matching those available in freeports, and including stamp duty land tax (SDLT) relief, enhanced capital allowances for plant and machinery, enhanced structures and buildings allowances, and relief from employer’s National Insurance contributions.
Personal taxes
Non-tax measures – There were non-tax measures relating to childcare costs and the Energy Price Guarantee that will be welcomed by many households. In particular:
- the childcare system is to be reformed with eligible households qualifying for 30 hours of free child-care for all children over the age of nine months, until they start school, from September 2025. Eligible households are broadly those where both parents work 16 hours a week. The measure will be phased in, with all two-year-olds qualifying for 15 hours of free childcare from April 2024; and
- the Energy Price Guarantee is to remain at £2,500 for an additional three months (April to June 2023), saving the average family a further £160. The planned increase to £3,000 per year will be implemented on 1 July 2023.
Pension allowances – As part of a pensions tax reform, the pension contributions annual income tax allowance will increase from £40,000 to £60,000 from 6 April 2023, and the pension savings lifetime allowance will be abolished from April 2024. The lifetime allowance charge will be removed from 6 April 2023. Other pension measures announced include:
- the annual money purchase allowance for pension contributions by existing pensioners will increase from £4,000 to £10,000 from 6 April 2023; and
- the pension commencement lump sum allowance will remain at 25% of the current lifetime allowance (£268,275) and will be frozen at that level.
Individual Savings Accounts – the annual subscription limit for adult Individual Savings Accounts (ISAs) is frozen at £20,000 for the 2023-24 tax year. The limit for Junior ISAs and Child Trust Funds will remain at £9,000.
Customs and excise duties
Alcohol duties and the draught relief – the existing draught relief, which imposes lower excise rates on draught alcohol products, is to be increased from 1 August 2023, to further differentiate the duty costs of product sold in public houses against those sold via other outlets, such as supermarkets. The relief on draught beer and cider products increases from 5% to 9.2% and for wines, spirits based and fermented draught products from 20% to 23%.
The economist’s view
Spring Budget: The theory is sound, execution may be more difficult
Today’s Spring Budget was probably a little more generous than we expected, but the Bank of England Monetary Policy Committee (MPC) won’t need to worry about tightening policy to offset it, given most of the extra spending focuses on boosting the medium-term supply side of the economy. Indeed, the MPC is far more concerned about the short-term financial market volatility associated with Credit Suisse than it is about a little bit of extra government spending.
If the supply side reforms to boost labour market participation and business investment are successful (a big if), then it should support economic growth, reduce inflation and lower the need for the Bank to keep interest rates higher for longer.
The risk is that with a razor thin margin against his headroom, any underperformance against the Office for Budget Responsibility (OBR) forecasts means the chancellor will have to row back on some of these measures in the next Budget.
Has the UK avoided a recession?
According to the OBR – yes.
The fiscal watchdog now expects growth to flatline in Q2 after falling in Q1, meaning that the UK would avoid a technical recession (two consecutive quarters of falling growth). This means the peak-to-trough fall in GDP is just a quarter of the 2.1% fall assumed in the November forecast and output regains its pre-pandemic peak in the middle of 2024, six months earlier than expected back in November.
Admittedly, the economy has been much more resilient than anyone thought it would be just a few months ago, and a recession is certainly not guaranteed. But given most estimates suggest less than half of the impact of interest rate rises has been felt so far and the extreme tightening in financial conditions over the last week, a mild, short recession remains our base case.
Supply side reforms will boost growth if they work
The theory here is sound, which is more than can be said for all recent Budgets. The improvements in the economic outlook mean that before the new policy measures, the OBR judged that chancellor Hunt would have headroom of £14.5bn against the main fiscal rule of underlying debt as a percentage of GDP falling in five years’ time (ie 2027/28), compared to headroom of £9.2bn in November. The chancellor used 55% of that and banked the rest, to leave the final headroom at a slim £6.5bn (0.3% of GDP).
Mr. Hunt’s most significant measure was the announcement of full capital expensing for companies for the next three years, which will cost the Exchequer £9bn a year and likely boost business investment by about 3%, relative to the counterfactual. This measure alone accounted for nearly half of the £22bn discretionary loosening in 2023/24 announced today. Given the UK’s dire record on business investment – and that this is one of the key reasons why the UKs productivity has been poor – any boost to business investment is to be heartily welcomed.
Similarly, efforts to improve childcare and get more people back into work should be applauded, given that the UK workforce is still about 1% smaller than before the pandemic – significantly holding back growth.
Policy implications
In theory, todays Budget argues for a little bit more tightening by the Bank of England at next week’s MPC meeting. Further support for businesses and households around energy prices, more defence spending and tax breaks for business investment will boost demand this year. However, the MPC is unlikely to be too concerned about the inflationary impact of these commitments. Lower energy bills will help headline inflation fall and extra defence spending is unlikely to boost demand in the broader economy.
By far the biggest issue at next week’s MPC meeting will be inflation vs financial stability. We had already thought the chances of a rate hike next week were probably at 50%, but the flare up of risks around Credit Suisse today and associated moves in financial market makes that probability even smaller. It now looks like the MPC will press pause a meeting earlier than we previously expected.
In the medium term, the measures announced today should boost the supply side of the economy. Getting more inactive people back into work will be crucial to bringing down wage growth, and by association services inflation and reducing the need for further interest rate hikes. And any boost to business investment should improve productivity and reduce inflationary pressures.
Further analysis of the Budget can be found on RSM’s website – here
