Tax Update – Autumn Statement 2023

Business taxes

Whilst the Chancellor heralded the statement as a confection of ‘110 growth measures’, many of the tax changes were a continuation, or extension, of measures that are already in place – or simple announcements of future changes that are being considered.

Rather than sweeping changes across the board, the Autumn Statement was made up of measures targeted at specific areas of the economy, with the main focus on businesses and getting people back into work.

One of the main measures introduced in earlier budgets to reduce the impact of hiking corporation tax rates to 25% was to accelerate deductions for capital expenditure by allowing full expensing.

Full expensing allows a company to deduct 100% of the cost of capital expenditure on new plant and machinery in one go, in effect giving an ‘immediate’ refund of 25% of the cost of plant and machinery in the year in which the expenditure was incurred. By contrast, capital allowances ordinarily work by drip-feeding deductions for capital expenditure on an annual basis, deferring the benefit over many years.

There is an obvious cashflow advantage of getting the money back immediately, and especially in the current climate of relatively high levels of inflation, this means that any tax saving now is worth more than a tax saving received in future years.

Full expensing was originally introduced with effect from 1 April 2023, as a temporary measure to be in place only until 31 March 2026, but the Chancellor announced in the Autumn Statement that the change would be permanent.

This is principally a benefit for large businesses spending more than £1 million a year on plant and machinery as the Annual Investment Allowance (AIA) provides the same benefits as full expensing and has been around for some time.

For smaller businesses

For sole traders and partnerships, the abolition of Class 2 National Insurance Contributions will give some benefit but more significant is the reduction in Class 4 contributions from 9% to 8%. It is interesting to note that this reduction (1%) is lower than the reduction for employees (2%) reducing margin between the rates for employees as against the self-employed.

Research and Development

As in previous years, the Chancellor has held out the UK as a preferred jurisdiction in which to establish new technology businesses. As a measure to simplify the system, the Autumn statement introduces a single programme to replace the two existing R&D tax reliefs – Research and Development Expenditure Credit (RDEC) and the SME R&D tax scheme.

A merger of the two schemes has been under discussion for some time, so this announcement is not surprising. The devil will be in the detail, but the new combined scheme is likely to more beneficial to companies previously only eligible for the RDEC scheme. In particular:

• The rate offered under the merged scheme will be implemented at the current RDEC rate of 20% (although the notional tax rate applied to loss-makers in the merged scheme will be the small profit corporation tax rate of 19%, rather than the 25% main rate currently set in the RDEC)
• The merged scheme will adopt the more generous PAYE and National Insurance contributions cap, which is currently applied in the SME scheme – which means that fewer large businesses will need to consider whether they are at risk of hitting it.
• Under the existing SME R&D tax scheme, a loss-making company must spend at least 40% of its total expenditure on R&D costs to be allowed to claim a repayable tax credit. This is being reduced to 30%, widening the number of companies that will be able to claim the tax credit.

Thus, in addition to simplifying the tax system by combining the two R&D tax regimes, this measure continues the trend of extending the scope of support to larger businesses, as well as SMEs.

Additionally, recognising that R&D intensive industries, such as life sciences and digital technologies, are key to fostering economic growth, further measures focussing support for a wider range of R&D intensive SMEs are being introduced.

Taxes for individuals

The main change for individuals is the reduction of National Insurance Contributions for employees, with the basic rate being reduced from 12% to 10%. Coupled with the increase in the national living wage, the measures are part of the Government’s target to increase the benefit for people to work.

Investment Zones

Investment zones are a survivor from Kwasi Kwarteng’s short lived mini growth budget of September 2022. A number of tax reliefs apply to Investment zones SDLT does not apply to land acquired for development in them, 100% tax relief applies to plant and machinery purchases, and the first £50K paid to an employee would be exempt from employer NIC.

There has been much criticism that these benefits were programmed to end after five years, given that it could take two to three years to establish a business. The benefits were hardly significant in the circumstances. It is welcome to see that the autumn statement extends the period for investment zones tax reliefs from five to ten years. The announcement of further investment zones in England and Wales was also announced.

If you have any questions, or would like to discuss further, please contact Leigh Sayliss or Philip Alfandary.