A&M Tax Advisor Update
UK Chancellor Rishi Sunak has today delivered his Spring Statement and, contrary to expectation, much of his speech to the House of Commons centred on taxation reform.
In the announcement, Sunak introduced a new Tax Plan setting out his approach for taxation for the rest of this Parliament. The plan focuses on three key areas:
As expected, the Chancellor resisted calls to abolish or delay the introduction of the new Health and Social Care Levy which will see an additional 1.25 per cent added to both employers’ and employees’ national insurance (NI) costs from 6 April 2022. However, he did increase the income level at which NI becomes payable from £9,880 to £12,570, starting, from July 2022. This will align the new levy with the income tax personal allowance so that anyone with earnings of less than that amount should not pay any tax at all.
This seems a sensible way of targeting help with rising living costs at those that need it most, albeit it will represent a reasonably modest tax cut of less than £30 a month for most employees.
The other headline measure targeting the cost of living crisis was a 5 pence per litre cut in fuel duty for the next 12 months, with effect from 6pm today. Whilst the measure is estimated to cost the Treasury £2.4 billion, for the average domestic vehicle user it is likely to amount to a reduction in fuel bills of around £100 per year.
The Chancellor’s pledge to “Share the proceeds of growth with more fairly” refers to a reduction in the basic rate of income tax from 20 percent to 19 percent from 6 April 2024. This is a £5 billion giveaway that perhaps tellingly will come into effect less than a month before the next General Election provided that certain fiscal tests are satisfied. There will also be a review of over 1,000 tax reliefs and allowances that are currently being analysed in order to make the tax system simpler, fairer and more efficient.
In the sections below, we examine aspects of the Tax Plan that are aimed at encouraging private sector businesses to invest, train and innovate more.
As anticipated in the Chancellor’s annual Mais lecture in February, the Statement announced a reform of capital allowances, with detailed changes to the reliefs available for capital expenditure to be included in the 2022 Autumn Budget. Based on comments in the Chancellor’s speech, we expect a consultation with businesses in this area to be announced soon.
The Statement referenced the comparative generosity of other OECD countries when it comes to tax relief for business investment, suggesting a commitment to changing this imbalance. The Tax Plan puts forward the following possibilities:
The suggested increase in the annual writing down allowances would represent a welcome return to the previous rates available up to March 2018, but the other suggestions are arguably more interesting. A permanent first year allowance akin to the current Super Deduction should be encouraged, as it would allow businesses to recover a higher proportion of their investment in the first year when combined with the planned increase in the rate of corporation tax to 25 percent.
The suggestion in the Statement of an additional enhanced first year allowance spread over an extended period of time, rather than just in year one, has a layer of complication that if removed could deliver a valuable enhancement to the current reliefs.
The final option allowing for the immediate write-off of capital expenditure for tax purposes would be a first for a G7 country if applied on a permanent and uncapped basis.
With only 18 percent of working age people in the UK holding a vocational qualification, the government wants to encourage businesses to invest in skills training alongside its own investment.
Businesses already obtain tax deductions for relevant staff training, and the government will consider whether further tax measures, including a review of the Apprenticeship Levy, are required to encourage the desired investment.
Additionally, for eligible employers, the Employment Allowance will increase from April 2022, meaning a reduction in employer NICs bills of up to £5,000 per year.
The third limb of the Tax Plan for businesses concerns incentivising research and development (R&D) activities. The government reiterates its commitment to refocus the support it provides for innovation in the UK to ensure that the benefits of R&D which has been funded by the relevant reliefs are captured more effectively.
The government has listened to feedback on its previously proposed reforms to the R&D tax relief system, indicating a less restrictive approach to claiming cloud computing costs (increasing the costs in scope and reducing the administrative burden) as well as permitting relief for overseas R&D in some cases. However, the proposals aren’t sufficiently detailed to understand their full impact, particularly how restrictive the rules around overseas R&D will be in practice.
A minor extension has been made to the scope of R&D activities to include “all mathematics”. While this change brings the UK regime in line with several other countries, , it doesn’t address some more fundamental issues such as the definition of R&D used by the Department for Business, Energy & Industrial Strategy, which is increasingly diverging from how businesses undertake R&D, and therefore will likely have limited impact.
The Statement notes that the government is considering increasing the generosity of RDEC (R&D expenditure credit). An increase in the headline credit rate from 13 percent to 14 percent would be required just to maintain the current level of net benefit following the forthcoming increase in the corporation tax rate to 25 percent, so it will be interesting to see how much further the Chancellor goes.
No comment was made on modifications to the Patent Box regime;. This relief will automatically become more generous when the corporation tax rate increases, and for some businesses this will have a significant impact on their tax forecasting.
Overall, the announcements were expectedly light on specifics. And while the changes announced today are broadly positive, we will have to wait for the next Budget to understand the true direction of travel for UK innovation incentives.