A new culture of enterprise was one of the headings in the Chancellor’s 2022 Spring Statement. It went on to say that improving productivity is the only way to deliver sustainable economic growth and increase living standards. The statement then followed with a note reiterating the government’s three priorities: capital, people and ideas. The measures that were announced, some being repeats from earlier but some being new, did seem to follow those headings.
Our tax teams across Sagars and AAB have highlighted below some of the key areas that were brought out in the statement yesterday.
Personal taxation matters
An interesting move was the alignment of National Insurance Contribution (NIC) limits with the income tax limits, so that now people can earn £12,570 a year without paying any income tax or NICs. This is a jump in the threshold of £3,000, and was noted as being intended to help hard working people to keep more of their earned income. This will take effect from July (not April) presumably due to the close proximity to the new tax year. The increase will also apply to the self employed as the lower profit limit is also increasing to £12,570.
The new health and social care levy of 1.25% is still coming into force from 6 April. This applies to both NICs and dividend taxes. It was stated that even with the new levy, around 70% of those paying NICs will pay less, presumably it is the remaining 30% that will pay more.
Following on from that it was announced that from April 2024, the plan is to decrease the basic rate of income tax from 20% to 19%, however whether Scotland gets to benefit from this reduction will have to be decided by the Scottish Government.
For employers, it was announced that the Employment Allowance will increase to £5,000 – so eligible employers can reduce their employer NIC bill by £5,000 from April 22. This will be a help to smaller businesses where the additional levy on NICs will come into force in April.
Research and Development tax relief reform
Whilst some of this isn’t “new news”, it has been confirmed that cloud computing costs associated with R&D, including storage, will qualify for R&D relief from April 2023. It had also been proposed that the legislation will change to primarily benefit R&D undertaken in the UK but it has now been recognised that some R&D may need to be undertaken abroad, so it is being suggested that overseas R&D can still qualify where there are material factors such as geography, environment, population or other conditions not present in the UK and required for the research (the example being deep ocean research), or regulatory or other legal requirements that mean activities must take place outside of the UK, for example clinical trials.
In addition, the definition of R&D for tax reliefs will be expanded by clarifying that pure mathematics is a qualifying cost, again from April 2023.
The Chancellor reiterated when he spoke that there would be wider reforms to R&D to “deliver better value for money for the taxpayer while being more generous where they can make the most difference.” There were no specifics on this but it has been stated again that the government will consider increasing the generosity of the RDEC scheme, which mostly applies to larger companies in order to boost R&D investment in the UK. At the same time, there remain concerns about the abuse of the R&D tax reliefs and there is a focus on tackling this.
At the budget in 2020 it was noted that the Enterprise Management Incentive scheme (EMI) would be reviewed to ensure it provides support for high growth companies to recruit and retain the best talent. The government has concluded that the current scheme remains effective. The review will now expand to consider the Company Share Ownership Plan.
The super-deduction was brought in from April 2021 for a two year period. This allowed companies to claim capital allowances at a rate of 130% on qualifying plant and 50% on fixtures. As this was just a temporary relief, it has been stated that the government will look at how further reforms could best support economic growth, and ensure the UK remains a competitive place to invest.
Some of the changes being considered include extending the annual investment allowance limit (currently £1m but reducing to £200k in April 2023), increasing the level of writing down allowances (which have previously been reduced), or the use of a new first year allowance, or another form of super deduction. These are being considered ahead of the Autumn Budget.
As a reminder, the super deduction will finish on 31 March 2023. Assets bought in a corporation tax period ending after 31 March 2023 (but acquired before the end date) will benefit from a reduced super deduction – if your year end is 31 December 2023, the super deduction reduces from 130% to 107.4%.
Increase in corporation tax rates
As another reminder, from 1 April 2023 the main rate of corporation tax will increase from 19% to 25%. There will be a tapering for small businesses with profits below £250k, subject to the reintroduction of the concept of “associated companies”. A single company with profits of up to £50k will still pay corporation tax at 19% next year, the rate increasing to 25% at profits of £250k. Companies that are regarded as “close investment holding companies” will pay at the main rate of 25%. These are primarily companies holding investment portfolios, or companies with rental properties where they are let to related parties.
Extended VAT Relief on Energy Saving Materials (ESM)
Currently, unless certain social policy conditions are met, VAT at the standard rate (20%) is payable on the installation of ESM in residential properties, including both the installation services and cost of the ESM. Where the conditions, which were introduced following EU infraction proceedings in 2019, are met or where the cost of the ESM does not exceed 60% of the total value of the supply (“the 60% test”), the supply qualified for the 5% reduced rate of VAT.
Households in Great Britain that install ESM on or after 1 April 2022 will benefit from the zero rate of VAT for a time limited period from 1 April 2022 to 31 March 2027. Importantly, the zero rate relief does not apply to installations at commercial/non-domestic properties and, under the Northern Ireland Protocol, the position in Northern Ireland will remain unchanged. In addition to the change in the VAT rate, the social policy conditions and the 60% test are removed and wind and water turbines will be recognised in UK legislation as qualifying ESM.
The measure should reduce the VAT cost for households across Great Britain that install ESM and is a welcome development in line with the wider net zero agenda.
Temporary cut to fuel duty
In accordance with the Spring Statement, from 6pm on 23 March 2022, the duty on petrol and diesel will reduce by 5p per litre across the UK. This reduction is temporary and will only remain in place for a period of 12 months. The measure results in a reduction in the duty rate applied to unleaded petrol and diesel from 57.95p to 52.95p per litre, with an additional 1p VAT saving also resulting. Whilst it only partly mitigates the fuel price increases seen over the past month, the reduction will be welcomed by businesses and households purchasing fuel at the pumps.
If you would like to discuss any points raised during the Spring Statement, please contact Kate Naylor, Corporate Tax Partner at Sagars; Alistair Duncan, Director and Head of our Indirect Tax team; Lynn Gracie, Private Client Tax Director; or your usual contact.