For those of us still in recovery after the shocks of the Mini-Budget in the autumn, which led to the rapid downfall of the Truss Government, today was a return to the safety of pre-announced changes, so there were no real surprises, other than the abolition of the pension Lifetime Allowance.
However, while the Chancellor heralded the Budget as one which is “cutting tax for businesses to invest and grow”, he unfortunately didn’t mean a reversal of the disliked and widely criticised introduction of the 25% Corporation Tax rate.
Disappointingly, although really not unsurprising, the 25% rate will still be introduced from 1 April 2023 for companies with profits over £250,000. Moreover, there is no announcement of any expected future date at which the rate may be reduced.
The Chancellor’s so-called “tax cutting” measures for corporates are two-fold: firstly “full expensing” of capital expenditure and, secondly, “increased support for R&D”. It was otherwise a quiet and relatively dull Budget both for individuals and for UK companies and their owners.
Private Client Commentary
The surprise announcement for the day was the removal of the Lifetime Allowance charge from 5 April 2023 with its complete abolition from April 2024. The Lifetime Allowance is the amount that you can build up in a pension and still receive tax benefits on. Amounts in excess of this can attract punitive tax charges. The Lifetime Allowance is currently set at £1,073,100 but was much higher, at £1,500,000, when it was originally introduced in 2006.
However, the devil is in the detail. Currently, on retirement, it is possible to take 25% of your pension as a tax-free lump sum but from April 2023 the amount that you will be able to take tax-free will still be capped at 25% of £1,073,100 (£268,275) excluding those with protected pension pots.
Provided a taxpayer has a valid enhanced or fixed protection in place by 15 March 2023, they will continue to be eligible to receive a tax free lump sum which is equivalent to 25% of their protected pension fund amount. Additionally, where a taxpayer has a valid enhanced or fixed protection in place by 15 March 2023, from 6 April 2023 onwards the taxpayer will be able to make pension contributions without impacting upon their protection.
The Annual Allowance (being the amount you can contribute to a pension and claim tax relief on) has been increased from £40,000 to £60,000 with the tapered allowance being increased from £4,000 to £10,000 for those with adjusted incomes of more than £260,000 (increased from £240,000 previously). This is a welcome increase although those on higher salaries will still consider the £10,000 allowance to be restrictive and will need to continue to be mindful that contributions (including employer contributions) in excess of this figure are subject to the Pensions Savings Charge.
The real beneficiaries of this change are those who accumulated significant pension pots prior to the major restrictions on contributions introduced in 2011. Today’s high earners still face restrictions on what they can contribute to their pensions so the chance of accumulating a pot that could possibly have reached the lifetime limit seem sadly remote. The beneficial impact of today’s big announcement will therefore be relatively limited.
UK residents who receive carried interest are sometimes liable to tax in other jurisdictions on their distributions. Previously it was difficult to obtain relief for the overseas tax due to the timing differences for the recognition and charging of the carried interest resulting in double taxation. A measure has been announced to allow individuals to secure double tax relief. This will be by election to tax the carried interest at an earlier time in the UK than under the current rules to enable the claim for tax relief. This has been backdated to 6 April 2022 so affected individuals should review their position with the filing of their 2022/23 tax returns accordingly.
Simplification measures for low-income trusts and estates
Whilst simplification measures are welcome to exclude low-income trusts and estates from paying tax and filing tax returns, it should be remembered that non-taxable trusts are still required to register under the Trust Registration Service (TRS) with no de-minimis. There is a cliff edge approach to the simplification as the income limit set for both trusts and estates is £500 and anything in excess of this will result in a tax liability and filing requirement.
Making Tax Digital
The previously announced deferral of the introduction of Making Tax Digital has been confirmed together with the income limits.
All self-employed individuals and landlords with income of more than £10,000 were to be mandated to join Making Tax Digital from April 2024 and partnerships from April 2025.
Following significant lobbying, the requirements for mandating individuals into Making Tax Digital have been revisited. Thankfully now only self-employed individuals with income of more than £50,000 will be mandated to join Making Tax Digital from April 2026 and self-employed individuals and landlords with income between £30,000 and £50,000 will be required to join from April 2027.
This will be accompanied by changes to penalties for late filing and payment of tax for non-compliance for the same categories of individuals.
It will remain to be seen if there are any further setbacks in HMRC’s strive for digitalisation. The path so far has been much delayed, and the new target date may prove to be more of an aspiration than a reality if the past is a guide to the future.
Currently, the Capital Gains Tax pages of a tax return are broken down into “residential property and carried interest” “other property, assets and gains”, “listed shares and securities” and “unlisted shares and securities”. As part of HMRC’s continued focus and clamp down on crypto – an area of perceived tax avoidance – a further section will be introduced for crypto asset disposals. It is likely that HMRC will use this information to check that disposals of crypto has been reported correctly and may also trigger reviews of disclosure in previous years.
Corporation Tax Commentary
Full expensing – a giveaway or a headline grabber?
Hunt’s biggest headline grabber was an introduction, from 1 April 2023, of full expensing. Companies, for a period of three years, will be allowed to ‘fully expense’ new (but not second-hand) plant and machinery expenditure which would otherwise qualify for 18% writing down capital allowances, or expense 50% of the cost if the expenditure would have qualified for the special rate of 6%.
In many ways, this measure offers a continuation of the Super-Deduction as it also results in 25% relief in the year of expenditure. (The Super-Deduction, which ends on 31 March 2023, gave 130% relief at the tax rate of 19%, equating to 25% relief).
The Chancellor can be applauded for introducing a new uncapped relief, albeit time limited, but can he really sell this as a tax cut for business? It certainly accelerates tax relief, but it doesn’t actually increase relief and therefore represents a timing difference in tax relief only.
Furthermore, it accelerates relief for only the 1% of companies in the UK that have capex in excess of the annual investment allowance (AIA) of £1 million, and so will benefit only the largest businesses in capital intensive sectors.
The vast majority of Owner Managed Businesses will see no benefit at all but will see their Corporation Tax bill increase from April 2023.
A row back on R&D – but only for some
The Chancellor’s second big announcement was to “increase support for R&D” for SMEs; having only recently hugely reduced R&D relief for SME’s!
This is a targeted increase in R&D relief for SME’s and will only apply to companies that are considered ‘R&D intensive’ (broadly, companies whose R&D expenditure exceeds 40% of their total expenditure). The Treasury estimate it will apply to around 20,000 SMEs.
The new R&D scheme will apply to accounting periods beginning on or after 1 April 2023 and will offer a 27% tax credit on qualifying R&D spend.
This is clearly a welcome announcement for many start-up technology, pharma and life sciences companies, but the timing and the proposal itself must surely be regarded as ironic. Only six months ago, the Government announced a decrease in the enhanced tax deduction under the SME scheme to 86% and the SME tax credit to only 10%. There have also been further restrictions on the quantum of relief through a PAYE cap and where R&D is carried out overseas (although with the latter measure delayed by 12 months in today’s statement).
Moreover, the introduction of a third R&D scheme (on top of the SME and RDEC schemes) comes shortly after a Treasury consultation in which they proposed reform of R&D and the quiet dismantling of the SME scheme altogether.
Rather than R&D relief becoming an incentive to do business in the UK, the complexity of the rules may in fact frighten companies away. It will certainly keep advisors busy over the coming months.
Enterprise Management Incentives – a relaxation of rules
Companies granting share options under the Enterprise Management Incentives (EMI) scheme will benefit from April 2023 from simplifications to the process to grant options. This includes, from 6 April 2023, removing requirements to sign a working time declaration and setting out details of share restrictions in option agreements. This will be welcomed by directors, advisors and HMRC alike, as much time historically has been wasted by all parties agreeing with HMRC that the failure to meet these conditions on grant of options won’t disqualify the options on an exit event at a later date.
In addition, from 6 April 2024, the deadline for notifying an Enterprise Management Incentives option will be extended from 92 days following grant to 6 July following the end of the tax year.
Good news for small brewers
There was welcome news for small and independent brewers who have suffered record levels of insolvency due to spiralling costs of production with ‘draft beer relief’. They can now compete a little more with supermarket bottles and bigger brewers.
In addition, the freezing of fuel duty for the 13th year and the continuance of the 5p reduction in fuel duty means that transport related inflationary pressures are stabilising for the time being. These fuel costs impact the importation, distribution and storage of goods including food stuffs as transport is one of the biggest costs to industry and their supply chains.
VAT escaped relatively unscathed today. All VAT rates remain unchanged with the registration threshold already frozen at £85k until 2026.
The limited measures announced were calls for evidence or proposing future legislation in specific areas. The extension of the exemption for medical care services supervised by healthcare providers to pharmacists and extending the zero rate of VAT to prescriptions to Patient Group Directions were the only VAT related changes announced today and likely to only impact a relatively small group of businesses.
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