Budget 2023 – Incentivising investment and postponing retirement?
The main focus of the Chancellor’s announcements at the Budget 2023 were always going to be about growth, but given the turbulence from the fiscal events of last year, there wasn’t going to be much on the agenda for tax – the only significant tax announcements were to incentivise businesses to invest and to retain (or regain) the over 50’s within the workplace.
An incentive for companies to invest
A key move was the announcement of a full expensing policy for qualifying plant and machinery to boost economic growth. In addition, it coincides with the end to the super-deduction, and so as you may expect, it has the same limitations in that it will only apply to companies and to expenditure which would otherwise fall into the main pool.
Where a company pays tax at the main rate, this will provide a benefit of 25% on capital spend (which is the same that would have been received under the super-deduction). Given the proportion of companies within that bracket (estimated as 10%), most companies will benefit at either the starting rate of corporation tax (19%) or the marginal rate (26.5%).
All this sounds good, but as ever, there is a catch. Where an asset which has been fully expensed is disposed of, a full and immediate balancing charge will arise on the proceeds (as opposed to the proceeds simply being added to the main pool).
The full expensing will come into effect from 1 April 2023 and although the intention is for this to be made permanent, at this stage, it is time limited and due to end on 31 March 2026.
Special rate pool assets (e.g. integral features) which do not qualify for the full expensing will benefit from an extension of the 50% first year allowance which was due to expire on 31 March 2023. This has been extended to 31 March 2026, but like the full expensing, is intended to be made permanent.
For those businesses not eligible to claim these reliefs (i.e. partnerships and sole traders) the benefit of the annual investment allowance will remain at the current level of £1 million.
R&D intensive SME’s
The Autumn Statement 2022 announced a number of changes to the R&D schemes which are due to come into effect from 1 April 2023 – key changes were to reduce the benefit available under the SME scheme and increase the benefit under the RDEC scheme.
However, there has been some backtracking on this for loss making SME’s which spend 40% of their total expenditure on R&D. This change does not have any impact on the reduction of the additional deduction (which from 1 April 2023 is reduced to 86% from 130%) but it does put back in place the rate of the repayable tax credit to 14.5% (which would otherwise have reduced to 10%). The effect of this is to allow for somewhat of a hybrid repayable credit of £27 for every £100 spent – this is better than the intended move to £18 but still a reduction from the effective repayable tax credit rate applicable before 1 April 2023 (being £33).
Nothing in tax is simple though, and although this change will take effect from 1 April 2023, a company cannot make a claim for this until it is legislated for. All we know on the timing of this is that the draft legislation will be issued for consultation in the summer of 2023 – this may suggest that the provisions will fall within the Finance Act 2024, which potentially leaves those companies needing this benefit in a quandary; claim early to get a reduced credit or delay the claim (and cash repayment) until who knows when?
Expansion of Seed Enterprise Investment Scheme (‘SEIS’) provisions
There was an expansion of the scope of the SEIS provisions to allow more companies to qualify – the gross asset limit was increased from £200,000 to £350,000, the age limit for a qualifying trade was increased from two to three years and there was an increase in the limit which a company can raise under this scheme from £150,000 to £250,000.
From an investor’s perspective, we also saw a double of the limit for investors to £200,000. All of these changes take effect from 6 April 2023, but with the draft legislation yet to be released, it’s not clear exactly how this will work.
Minor changes to Enterprise Management Incentive (‘EMI’) scheme
Although fairly minor, a few simplifications were announced to the administration of EMI schemes, all effective from 6 April 2023. These meant that with effect from that date, any options granted will no longer need to set out details of share restrictions within the option agreements and the company will no longer need to declare that an employee has signed a working time declaration (although that condition will still need to be met).
In addition, from 6 April 2024 there will be a change to the time limit a company has to notify HM Revenue & Customs of an EMI option being granted – this will move from 92 days after, but the date that the option is granted to 6 July following the end of the tax year in which the option was granted. A familiar date for those dealing with other employer share annual reporting, but with the passing of time, will this lead to more notifications being missed?
Pension changes ahead
In a drive to retain (or bring back) over 50’s to the workplace, the Chancellor announced some significant changes to the pension provisions – although these changes are aimed to prevent a significant tax charge arising on members of a defined benefit pension scheme (such as doctors within the NHS) their implications are much wider that this, making changes to the annual allowance and lifetime allowance for all.
The annual allowance is the maximum gross contributions which can be made to an individual’s pension scheme in a tax year without suffering a tax charge. It is currently set at £40,000 and is reduced by £1 for every £2 that an individual’s adjusted income exceeds £240,000 (subject to a minimum annual allowance of £4,000) – any pension contributions exceeding the annual allowance are taxed at the taxpayer’s marginal rate.
The lifetime allowance is the maximum value of an individual’s pension pot which can be built up without suffering a tax charge. This has moved over time but is currently set at just over a million – where this is exceeded, tax charges can arise when funds are withdrawn at up to 55%.
From 6 April 2023, the annual allowance will increase to £60,000, the adjusted income threshold to £260,000 and the minimum allowance to £10,000.
Somewhat more significant was the announcement that nobody will suffer the lifetime allowance charge from 6 April 2023 – although not technically abolished, this will follow at a later date. However, this is not an opening of the flood gates for tax-free lump sums to be taken out – these will be capped at £268,275 (being 25% of the current lifetime allowance limit) unless pension protection is already in place.
Although the ink is yet to dry on these changes, there is a commitment from the opposition to reverse this plan if they get into government, providing a more targeted relief instead.
Capital gains tax on separation
Currently, when a couple (married or civil partners) separates, capital gains tax can arise unless assets are transferred during the year of separation. As previously announced, from 6 April 2023, where the transfer takes place within three years of separation, or any period of time if they are subject to a formal divorce agreement, they will be free from capital gains tax.
In addition, where an interest in the matrimonial home is retained by one party (or they transfer this and are entitled to a proportion of the proceeds on a subsequent sale) then a claim for private residence relief on the sale will also be available. This excludes this from capital gains tax, although we do need to review the draft legislation (when available) to understand the detail of this.
Crypto asset reporting
From 6 April 2024, individuals will be required to separately identify crypto asset disposals on their tax returns – it is assumed that this is to help HM Revenue & Customs to identify assets, and potentially enquire into them, given that they are a bit of a hot topic at the moment.
Restriction to agricultural property relief
With effect from 6 April 2024, only land situated in the UK will now qualify for agricultural property relief and woodlands relief for inheritance tax purposes. Previously this was available for land situated in the European Economic Area, the Channel Islands and the Isle of Man, but this will no longer qualify.
If you’d like to discuss how the announcements affect you, please get in touch.