Becky Bowness Head of Tax andRichard Cole, Future Money Fund Manager provide their views on today's announcements.
Despite intense pressure to cut taxes in his first Spring Budget, the Chancellor resisted, and while he seemed to deliver a fiscal plan that promised to stimulate growth, as we look at the detailed proposals it is clear some of his announcements aren’t quite as generous as they first appear and will have relatively limited impact on most small and medium-sized businesses.
As anticipated, there were limited announcements on tax beyond those already made in the Autumn Statement, and many of the changes had also already been released through the press in recent days, so there were no real surprises beyond the abolition of the lifetime pension allowance which exceeded our expectation of an increase in the allowance.
Jeremy Hunt described his Budget as one for Growth based on the 4 pillars of the Government’s industrial strategy: Enterprise, Employment, Education and Everywhere. The Government wants to halve inflation, reduce public debt and get more people into work and back to work to boost economic growth.
With the Office for Budget Responsibility (OBR) reporting inflation will fall from the current 10.1 per cent to 2.9 per cent by the end of 2023, and with borrowing costs and energy prices lower than previously expected, it is now predicted the UK won’t enter a recession this year.
Growth or contraction?
The Chancellor came in with the promise of restoring credibility to the UK’s finances and yet he’s facing an economy which is languishing, and despite him speaking confidently that we’re outperforming, that’s unfortunately not the case. He’s talking about growth when there’s still going to be a 0.2 per cent contraction for the year!
While the economic situation is now improved relative to forecasts from just a few months ago, the UK economy remains subdued and is still forecast to lag behind its international peers.
Markets’ reaction
For the markets, it wasn’t going to be a budget where he would take big bold moves – nothing that would risk challenging stability so it is no surprise there wasn’t a lot in it from a markets perspective. The Chancellor was extremely mindful of the chaos created by Kwasi Kwarteng’s mini-budget of last Autumn, and while markets have fallen today, this is linked to negative developments in the banking sector, and not Jeremy Hunt’s announcements from the dispatch box.
Business taxation
The chancellor said he wants the UK to have the “most pro-business, pro-enterprise tax regime anywhere” and introduced enterprise measures which he said would lower business tax.
It was confirmed Corporation Tax rates will increase from April 2023 as planned, despite calls for this to be scrapped, with the Chancellor stating only 10 per cent of companies would pay the headline 25% rate and that at 19% “our corporation tax rate did not incentivise investment as effectively as countries with higher headline rates”.
On a more positive note, to replace the Super Deduction which ends on 31 March 2023, companies will be able to claim 100% relief on qualifying capital expenditure, such as IT equipment and Plant and Machinery, without any cap for the next 3 years. However, for many family-owned businesses the £1 million Annual Investment Allowance provides this relief already.
Full expensing only applies to incorporated businesses so partnerships and unincorporated businesses won’t benefit either. So, while the relief is more generous than we had perhaps expected, it is unlikely to have a significant impact on most SMEs.
R&D expenditure
It was announced that there will be an increase in the R&D tax credit that can be claimed by qualifying SME companies who “will receive £27 from HMRC for every £100 of R&D investment”. What this actually refers to is the repayable credit where the company is loss-making, and in order to qualify the company must incur at least 40% of its total expenditure on qualifying R&D activities, which is a relatively high threshold. It could also encourage businesses to artificially inflate their claims in order to benefit, which goes against the Government’s commitment to target spurious R&D claims.
While the Chancellor positioned this as a significant benefit and incentive to drive innovation, in reality, when we have considered the detailed proposals compared to the SME R&D scheme in its current form, the new rules are still not as beneficial.
Getting more people into work
While the Chancellor was expected to raise the pension Lifetime Allowance (LTA), which is currently £1,073,100, up to £1.8m, closer to its previous peak, he instead abolished it. The Government will remove the Lifetime Allowance charge from 6 April 2023, before fully abolishing the Lifetime Allowance in a future Finance Bill. Meanwhile, the Annual Pension Allowance will be increased from £40,000 to £60,000 from April 2023. Individuals will continue to be able to carry forward unused Annual Allowances from the 3 previous tax years.
There was good news for those that are looking towards making higher pension contributions with increases in the Annual Allowance to £60,000 and the removal of the Lifetime Allowance, making pensions a much more attractive investment/retirement vehicle.
Additionally, the Chancellor announced an expansion of the 30 hours free childcare to children from the age of 9 months, although this will not begin to apply until April 2024 and is subject to staged implementation. Further reforms to get more people into work, supporting those on benefits, older workers and those will health conditions were also announced.
The aim of the LTA abolishment is to get more experienced people to stay in the workplace. Similarly, it is hoped, the childcare announcement and the new voluntary employment system, Universal Support, will be beneficial for the economy. The labour force participation rate in the UK is very poor and that is one of the things holding back the country’s productivity and economic growth. If you can get more people in the labour market that will be good. The announcements sound like they should work, and while it’s a step in the right direction, only time will tell.
Watch our Spring Budget Analysis Webinar to hear what experts from our tax, financial services and accounting teams thought about the changes announced and how they could impact you and your business.
