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Freshfields Risk & Compliance

| 3 minutes read

Ready, Steady, Growth: Business tax implications of the UK Spring Budget 2023

The UK Chancellor of the Exchequer, Jeremy Hunt, has delivered the Spring Budget 2023. Following the instability experienced in the UK in recent months, it was a relief to many to see the Office for Budget Responsibility (OBR) confirm that ‘the economic and fiscal outlook in the UK has brightened somewhat’ since the Autumn Statement 2022 was delivered last November. That is not to say, though, that the UK economy was given a clean bill of health: the OBR also recognised that ‘weak underlying momentum’ remained, fuelled by high gas prices, stagnating business investment, rising labour market inactivity and slowing productivity growth. Against that background, it is perhaps no surprise that the Chancellor used this Spring Budget to introduce a range of measures – some headline-grabbing, others more subtle – designed to bring about ‘long-term, sustainable, healthy growth’.

In our latest podcast, London Tax partners Helen Buchanan and Paul Davison and London Tax senior associate Josh Critchlow discuss the business tax measures they found the most noteworthy in the Spring Budget 2023. Highlights from the podcast discussion are summarised in this blog post.

Encouraging business investment 

In line with expectations, the Chancellor confirmed that the main rate of UK corporation tax will rise from 19% to 25% from 1 April 2023, with the capital allowances super-deduction ending on the same date. Designed to mitigate the combination of these tax measures discouraging business investment in the UK, the Chancellor announced the introduction of new full expensing capital allowance rules, giving companies a 100% first-year allowance for capital expenditure on main rate assets over the next three years. For capital expenditure on special rate assets – including long-life assets and integral fixtures – the Chancellor announced a 50% first year allowance, with the remaining 50% to continue to be relieved on a 6% reducing balance basis. By dramatically accelerating tax relief which would otherwise take many years to unwind, these measures were the headline item in the corporate tax arena, carrying a price tag of almost £10bn per year.

In the field of research and development (R&D), the Chancellor confirmed that the previously-announced measures to bolster the R&D expenditure credit (RDEC) regime but reduce the generosity of the SME R&D regime would (largely) go ahead as planned. To soften the blow for R&D-intensive SMEs – seen as a critical part of the UK’s life sciences ambitions – the Chancellor announced additional relief for SMEs meeting certain expenditure conditions. With the consultation on merging the two R&D regimes having only recently closed, it is no surprise that a decision in this respect remains pending.

Taking a pragmatic approach?

Another big announcement, somewhat hidden in the depths of the Red Book, was the decision not to proceed with proposed changes to the scope of sovereign immunity from direct tax. These proposals had raised a number of concerns for key investors in UK infrastructure, real estate and other assets, and it will be a relief to many that the issues raised during the consultation process were listened to.

As discussed in the podcast, other new announcements included in the Budget materials also address concerns raised by taxpayers and HMRC alike: various amendments designed to ‘fix’ elements of key UK business tax regimes, including the corporate interest restriction, the qualifying asset holding companies regime and the real estate investment trust rules, have also been introduced.

Supporting the energy transition

The Chancellor also announced some new tax incentives and other funding specifically designed to support the UK economy’s transition to green energy, a move noted to be ‘essential to long-term prosperity’. This included confirmation that an enhanced investment allowance for decarbonisation expenditure would be introduced as part of the Energy Profits Levy, and that future legislation will establish the tax treatment of payments made into decommissioning funds by oil and gas companies in relation to the repurposing of ringfenced assets for use in carbon capture, usage and storage (CCUS) projects. Additional funding for CCUS projects and an announcement that nuclear will be reclassified as ‘environmentally sustainable’ so as to facilitate increased access to investment incentives were also included in the Budget.

As discussed in the podcast, against a backdrop of the energy windfall taxes introduced last year, and a suggestion from the Labour Party that money was ‘left on the table’ in this space, it remains to be seen how much comfort these measures will bring in practice.

Other key tax takeaways 

In the podcast, the team also considers a number of other key tax takeaways from the Spring Budget 2023. Most notable amongst these are the reforms to pension tax thresholds, including an increase in the annual allowance and the abolition of the lifetime allowance.

Further business tax changes are also on the horizon with the Spring Finance Bill scheduled to be published on 23 March 2023 and confirmation that we can expect another ‘Tax Administration and Maintenance Day’ in the coming weeks.  

Our Spring Budget 2023 podcast is available here. Further detail on the key takeaways of the Spring Budget 2023 from a People and Reward perspective is available here.