James Geary provides a summary of the Budget announcements relating to Business Tax which include R&D Tax Relief, Capital Allowances and the introduction of “full expensing”, Share Options and Venture Capital Schemes.
R&D Tax Relief
Significant activity has taken place to reform the R&D reliefs in the last year or two. We already knew that for expenditure from April 2023 onwards the enhanced deduction for small and medium sized businesses (SMEs) would decrease from 130% to 86% and the payable tax credit rate would reduce from 14.5% to 10% – taken together this almost halves the value of the relief to loss-making SMEs, and take a third off the value for profitable ones.
Alongside this the relief rate for the R&D Expenditure Credit (RDEC) scheme is increasing from 13% to 20%. The government have stated their intention to merge to a single scheme from April 2024, and the consultation on that change has only just closed. They will publish the summary of responses and draft proposals for this on Legislation Day in July 2023.
In this Budget the government has recognised that the drop in rates for SMEs is going to be challenging for R&D intensive companies and have therefore introduced a higher rate for loss-making SMEs with an “R&D intensity” of at least 40% – this means the proportion of qualifying R&D expenditure in relation to total expenditure for an accounting period. There are strict rules about how this 40% is measured, especially in situation where there are other connected companies.
The higher rate will be 14.5% – so effectively preserving the current tax credit rate – although the enhanced deduction will still reduce to 86%, so overall there is still a drop in relief for these SMEs, but just a less significant one (around a 20% reduction).
Claims for payments under this additional support are likely to take longer to process due to additional HMRC checks.
In a further change to the way in which R&D reliefs are claimed, there will be a new digital form which needs to be completed and submitted alongside the Corporation Tax Return including various supporting information. Originally this digital form was going to be mandatory for claim periods beginning on or after April 2023, but this has been significantly pulled forward so that all claims submitted from 1 August 2023 onwards, no matter the claim period, will have to have this digital form submitted for the claim to be valid.
One other piece of good news which became apparent after the main announcements was a delay to the exclusion of certain overseas costs in R&D claims – in particular subcontracting. These costs were due to no longer qualify from 1 April 2023 but this has been delayed by a year for simplicity reasons, in anticipation of moving to a completely new merged R&D relief scheme on 1 April 2024.
Capital Allowances and “Full expensing”
The “super-deduction” of 130% for new machinery and equipment comes to an end on 31 March 2023, and the government has recognised that alongside the Corporation Tax rate increase from 19% to 25%, the lack of something to replace it would leave the UK Corporate Tax system as highly uncompetitive.
They have therefore introduced “full expensing” for all new “main rate” plant and machinery for three years until March 2026, meaning all companies can obtain full tax relief on new and unused equipment in the year the expenditure is incurred – effectively a “bottomless” Annual Investment Allowance (AIA).
Alongside this, the current first year allowance of 50% for “special rate” equipment (including integral features of buildings and long-life assets) will be preserved for those three years, again for new equipment only.
The current £1 million AIA rate will continue to apply for any other qualifying purchases of used equipment. While the full expensing (like the super-deduction) is only available to limited companies, the AIA remains available to all businesses.
As currently, cars do not qualify for either full expensing or AIA, and items bought for leasing to someone else will not qualify for full expensing.
When an asset is sold that has had 100% relief under full expensing, the proceeds will be taxable in full upon disposal, and where the 50% FYA was claimed, then 50% of the proceeds will be taxable immediately.
This measure is going to be of most support to very large businesses that spend over £1 million per year on capital equipment, as most small or medium sized companies would have their expenditure covered by the AIA in any case.
Share Options
From 6 April 2023, the Company Share Option Plan (CSOP) employee share options limit will increase from £30,000 to £60,000. Additionally, restrictions on the types of shares eligible for CSOP options will be lifted.
Simplifications will also be made to the process to grant Enterprise Management Incentive (EMI) options. From 6 April 2023, there will no longer be a requirement for the company to set out any restrictions to the shares being acquired in the option agreement and the employee will no longer have to sign a working time declaration.
There are no other changes to EMI options in terms of limits and tax benefits so these remain a very attractive form of employee incentive.
Venture Capital Schemes
The Government is increasing the generosity and availability of the Seed Enterprise Investment Scheme (SEIS) for start-up companies. The amount of investment that companies will be able to raise under the scheme will increase from £150,000 to £250,000.
The gross asset limit will be increased from £200,000 to £350,000 and the investment must be made within 3 years (increased from 2 years) of trade commencing. In a bid to support these changes, the annual investor limit will be doubled to £200,000. The changes take effect from 6th April 2023.
If you have any questions about how the budget or its proposed reforms might affect you, do get in touch on 01242 776000 or tax@randall-payne.co.uk.
