Five days before the UK’s Chancellor Jeremy Hunt unveiled the Spring Budget, the Centre for Policy Studies issued a report on the UK’s declining tax competitiveness, noting that the combination of the rise in the headline corporation tax rate from 19% to 25% from April 2023 and the concurrent expiry of the super-deduction would see the UK “fall from 10th to 33rd of 38 OECD members in terms of the competitiveness of our business tax regime”.
It appears that the Chancellor listened: “If the super deduction was allowed to end without a replacement, we would have fallen down the international league tables for tax competitiveness and damaged growth. I could not allow that to happen” (Budget speech).
So, while the corporation tax rate increase will go ahead as planned, a new policy of “full expensing” will be introduced to blunt the edge of the expiry of the super-deduction. Full expensing (i.e. a deduction equal to 100% of the expenditure incurred) would be less generous than the super-deduction which allowed tax relief in an amount equal to 130% of the expenditure incurred, but accompanying media factsheet points out that the cash value of the deduction would be the same after the rate rise. Like the super-deduction, full expensing applies only to expenditure which would have otherwise qualified for capital allowances at the main rate of 18%, and will be supplemented by a 50% first-year allowance for special rate expenditure (with the balance qualifying at the existing 6% rate).
Full expensing will be legislated for in the Finance Bill 2023 which is due to be published on 23 March 2023. It will initially apply for three years, but the stated ambition is to make it permanent (a decision that will, most likely, be one for a different Chancellor).
The policy is predicted to cost on average £9 billion per year. The OBR report notes that “Full expensing also encourages businesses to accelerate their capital allowance claims which, together with its effect on the time profile of investment, means that it actually raises receipts by £2.2 billion in 2027-28 (and for perhaps a further decade beyond the forecast horizon).” This is also reflected in the government’s estimate of the Exchequer impact. In both cases, the expectation that the measure would be tax positive by 2027 would, however, seem to leave out of account the Chancellor’s stated intention of making full expensing permanent. The OBR report makes this explicit: “This is because the bringing forward of both claims and investment means fewer capital allowances to offset against taxable profits once the temporary measure has ended.”
Full expensing falls under the “Enterprise” pillar of the government’s industrial strategy to foster economic growth across the UK. The other pillars (there are four in total) are:
- Employment, in respect of which one highlight would be certain pensions tax changes which include an increase of the annual allowance from £40,000 to £60,000 from April 2023 (although the taper will remain in place albeit with the minimum more than doubled from £4,000 to £10,000, and the threshold increased to £260,000) and the removal of the lifetime allowance charge (with the lifetime allowance itself to be abolished from April 2024).
- Education, measures in respect of which include increased government funding for childcare.
- Everywhere, comprising a number of local investment measures, including the creation of 12 new Investment Zones with a single 5 year tax offer matching that in Freeports and at least one in each of Scotland, Wales and Northern Ireland.
Other measures under the “Enterprise” pillar include enhanced R&D credits for SMEs (see this post), additional funding for the early development of Carbon Capture Usage and Storage and, as part of the Autumn Statement, the Chancellor will announce measures to “unlock productive investment from defined contribution pension funds and other sources, make the London Stock Exchange a more attractive place to list, and complete our response to the challenges created by the US Inflation Reduction Act” (Budget Speech).
The Chancellor’s reference to an Autumn Statement suggests that, following the turmoil of recent years, the government may now have abandoned for good the model of having one major fiscal event per year in the form of an Autumn Budget as then Chancellor Philip Hammond had promulgated in November 2016. As regards other things to look out for, the Finance Bill will be published on 23 March 2023 and, according to the Red Book, there will be “a further set of tax administration and maintenance announcements later in the spring at a Tax Administration and Maintenance Day”.