March 16, 2023
UK Chancellor delivers Spring Budget 2023
On 15 March 2023, the UK Chancellor, Jeremy Hunt, delivered his first Spring Budget in which focused on tackling three of the five key priorities set out by the Prime Minister in January: to cut inflation by 50%, grow the economy and reduce debt.
As expected, the Chancellor continued with his previously announced tax rises and the freezing of tax thresholds. In particular, he resisted calls to abolish the rise in corporation tax to 25% from 1 April 2023. However, he did provide new targeted tax incentives addressing the Enterprise, Employment and Everywhere pillars of his growth strategy.
With draft legislation from July 2022 and announcements in the Autumn Statement, there was a lot of information provided today in addition to the new announcements.
The focus below is on the key business tax items announced for the first time but other already announced measures, such as the implementation of Base Erosion and Profit Shifting (BEPS) Pillar Two, changes to the Energy Profits Levy and the detail of the Electricity Generator Levy will feature prominently in the Spring Finance Bill 2023.
It has also been confirmed that the Government will make additional tax administration and maintenance announcements later in the spring at a Tax Administration and Maintenance day.
Business taxes: allowances and incentives
The Chancellor confirmed that the corporation tax rate would increase to 25% from April 2023. To offset both the tax rate rise and the end of the super-deduction, the Chancellor announced relief through full expensing of the cost of certain plant and machinery from a company's profits before tax. It is effective from 1 April 2023 to 31 March 2026.
It applies to spending on main rate equipment, which includes but is not limited to, warehousing equipment such as forklift trucks, tools such as ladders and drills, construction equipment such as bulldozers and excavators, machines such as computers and printers, vehicles such as tractors, lorries and vans, office equipment such as chairs and desks, and some fixtures such as kitchen and bathroom fittings and fire alarm systems.
The after-tax value of the relief is the same as that of the super-deduction. Full expensing results in a 25p tax saving for every £1 invested. The super-deduction was deliberately set at a rate to achieve the same result (19% x 130% super-deduction rate equals 25%) and reduce any incentive for companies to defer investment until the 25% rate applied.
The Chancellor has said his long-term ambition is to make full expensing permanent, which given the time necessary for new investment to be confirmed, may be key to its effectiveness.
The 50% first-year allowance (FYA)
This allowance was not highlighted in the Chancellor's Budget speech but will allow taxpayers to deduct 50% of the cost of special rate assets, from their profits during the year of purchase. This includes long-life assets such as solar panels and thermal insulation on buildings.
The 50% FYA was introduced alongside the super-deduction and was due to end on 31 March 2023. It is also being extended by three years to 31 March 2026. Again, the Chancellor's long-term ambition is to make the 50% FYA permanent.
Research and Development (R&D)
The Chancellor has announced a new R&D scheme for small and medium enterprises (SMEs) in the UK, effective from 1 April 2023. It is targeted at R&D intensive SMEs and in particular loss-making R&D intensive SMEs. A company will be considered R&D intensive where its qualifying R&D expenditure is worth 40% or more of its total expenditure.
Eligible loss-making companies will be able to claim a payable credit rate of 14.5% for qualifying R&D expenditure instead of the 10% credit rate for companies claiming support under the existing R&D SME scheme. The changes will take effect from 1 April 2023, with eligible companies able to claim once legislation is in place.
Draft legislation will be published for technical consultation in summer 2023.
The Government is keeping open the option of implementing a merged R&D scheme from April 2024. It will publish draft legislation on a merged scheme for technical consultation in summer 2023 and a final decision will be announced at a future fiscal event.
In respect of the R&D changes already announced, the Government will now require companies to provide a digital additional information form with their claims, for all claims made on or after 1 August 2023. However, the previously announced restriction on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023.
The Government will establish 12 Investment Zones across the UK, subject to successful proposals. Each zone will have access to support of £80 million over five years. Special tax sites can be designated in connection with Investment Zones. Special tax sites will be subject to approval by the Government and will be designated using secondary legislation.
Once designated, special tax sites will benefit from a package of tax reliefs which will be time limited with the exact end date confirmed at a future date.
For special tax sites in England, stamp duty land tax (SDLT) relief will be made available for purchases of land or buildings, subject to that property being acquired for qualifying commercial purposes and used for such purposes in a control period of up to three years.
Enhanced capital allowances of 100% will be made available for companies incurring qualifying expenditure on new plant and machinery primarily for use in a special tax site.
An enhanced rate of structures and buildings allowances of 10% per year for 10 years will be made available for qualifying expenditure on non-residential structures and buildings situated in special tax sites.?To qualify, construction must begin, expenditure must be incurred, and the building or structure must be brought into non-residential use for the purposes of a qualifying activity between the date the special tax site is designated and the relevant end date for that site.
Relief for secondary Class 1 National Insurance contributions will be made available for employers with physical premises in a special tax site on the earnings of new employees who spend 60% or more of their working time within special tax sites. This rate can be applied on the earnings of all new hires up to £25,000 per year for up to three years.
Audio-visual tax reliefs
The Government intends to reform all five audio-visual tax reliefs by moving them to an expenditure credit, using the Research and Development Expenditure Credit (RDEC) as the basis for the credit. The Government will adapt the RDEC model for the audio-visual subsectors.
The Government will implement two models: one for the film and TV expenditure credits, which will be merged into a single scheme (the Audio-visual Expenditure Credit), and one for video game expenditure credits (the Video Games Expenditure Credit).
Both models will retain the existing eligibility requirements and definitions of qualifying expenditure, but there will be changes to a number of definitions. Both models will have an 80% cap on qualifying expenditure. Full details will be provided as part of the draft legislation expected in Summer 2023.
Audio-Visual Expenditure Credit (AVEC): Films and high-end TV programs will have a headline rate of 34%. Animations and children's TV programs will have a headline rate of 39%
Video Games Expenditure Credit (VGEC): There will be a headline rate of 34%.
The expenditure credits will be phased in allowing companies to claim expenditure credits from accounting periods on or after 1 January 2024. From 1 April 2025, claims for new productions and games must be made under the expenditure credits system. Film and TV productions that have begun but not concluded principal photography, and video games that have begun but not concluded development on 1 April 2025 may continue to claim relief under the current system until 31 March 2027. Any expenditure incurred from 1 April 2027 must be claimed under the expenditure credit regime.
The Government also intends to introduce an anti-abuse measure on payments between connected parties. Draft legislation will be published in summer 2023 for consultation. The changes will take effect from January 2024.
Other business tax measures
Corporate Interest Restriction (CIR) rules
Legislation will be introduced in Spring Finance Bill 2023 to make a number of detailed amendments to the CIR rules which are aimed at ensuring the rules work as intended (this includes addressing unfair outcomes and reducing administrative burdens) and one legacy change to the former worldwide debt cap rules.
The Government will legislate in Spring Finance Bill 2023 to address the position where an asset is disposed of under an unconditional contract. The changes will apply in relation to contracts entered into on or after 1 April 2023 for corporation tax.
Real Estate Investment Trusts (REITs)
The Government will legislate in Spring Finance Bill 2023 to relax the requirement for a REIT to own at least three properties where a REIT owns at least one commercial property worth £20 million or more; and amend the rule for disposals of property within three years of significant development work to ensure that this rule operates in line with its original intention and is not compromised by the effects of inflation. Changes will also reduce administrative burdens for certain partnerships investing in REITs.
The changes to the three-year development rule will take effect in relation to disposals made from 1 April 2023. The other changes will take effect from Royal Assent of Spring Finance Bill 2023.
Qualifying Asset Holding Companies (QAHC) rules
The Government will legislate in Spring Finance Bill 2023 for a number of amendments to the QAHC rules. The central changes simplify and broaden the ability for funds to be Qualifying Funds for the purposes of the regime. In particular it will be more straight forward for funds to satisfy the GDO requirement (see below) regardless of whether houses operate Aggregator or Parallel Fund structures. Further amendments also simplify the entry criteria for Delaware LP funds; allow for QAHCs to hold listed shares and clarify existing treatment of instruments such as warrants.
The changes will variously take effect from Royal Assent of Spring Finance Bill 2023, 20 July 2022 and 15 March 2023, or be deemed to have always had effect.
Amendments to the Genuine Diversity of Ownership (GDO) condition
The GDO condition in the QAHC, REIT and Nonresident Chargeable Gains (NRCG) rules will be amended in Spring Finance Bill 2023. The GDO condition is intended to prevent funds that are only open to a small number of predetermined investors from benefitting from those regimes. The changes are intended to improve the operation of the GDO condition for fund structures involving multiple pooling vehicles and will take effect from Royal Assent of Spring Finance Bill 2023.
Write-downs for annuities products and insurers' liabilities
The Government will address the pensions tax and corporation tax consequences of write-downs of liabilities of insurers in financial distress under the proposed new section 377A Financial Services and Markets Act 2000, and any subsequent court-ordered variation or termination of those write down-orders. The measure will take effect from Royal Assent of Spring Finance Bill 2023.
The Chancellor has announced that the UK's sovereign tax exemption will continue to operate as it does now.
Energy profits levy (oil and gas) decarbonization allowance
Qualifying expenditure for the decarbonization allowance within the oil and gas energy profits levy is to include expenditure on powering oil and gas production facilities from non-fossil fuel sources, and reduction or elimination of flaring and venting of greenhouse gases. Further details are expected within the Spring Finance Bill 2023.
Carbon capture (CCUS)
Legislation will be included in a future Finance Bill on the tax consequences of oil and gas companies making payments into decommissioning funds where this relates to the repurposing of assets within the oil and gas corporation tax ring-fence for use in CCUS activities. The changes will take effect at a future date, following Royal Assent of the Energy Bill.
As well as previously announced changes to allow ships to return to the UK, Finance Bill 2023/24 will permit third-party ship management companies to join the Tonnage Tax regime and raise the limit on capital allowances to £200m for lessors of ships into the regime. These measures will take effect from 1 April 2024.
Exchange of information
The Government will legislate in Spring Finance Bill 2023 to consolidate five powers that allow Automatic Exchange of Information (AEOI) regulations to be laid. These powers cover the Mandatory Disclosure Rules (MDR), the Common Reporting Standard (CRS), Foreign Account Tax Compliance Act (FATCA), Country-by-Country Reporting (CbCR) and Reporting Rules for Digital Platforms regulations.
This measure will consolidate these powers into one provision to simplify the legislation, and the previous powers will be repealed once this consolidation has happened. At the same time there will be a technical amendment to the power that allows MDR regulations to be laid so that these regulations work as intended.
This measure will take effect from Royal Assent of Spring Finance Bill 2023.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United Kingdom), London
Ernst & Young LLP (United States), UKTax Desk, New York
Ernst & Young LLP (United States), FSO Tax Desk, New York
Ernst & Young LLP (United States), Transaction Tax Desk, New York
Ernst & Young LLP (United States), UKTax Desk, Chicago
Ernst & Young Tax Co. (Japan), UK Tax Desk (Asia-Pacific), Tokyo