2023 Spring Budget Analysis: Corporation Tax

Corporation Tax Rates
As expected, the Government announced no further changes to the main rate of Corporation Tax which will rise to 25% from 1 April 2023 as enacted in the Finance Act 2021. The main rate will also be set at 25 percent and the small profits rate at 19 percent for the financial year beginning 1 April 2024.

For companies subject to the small profits rate, a technical fix will be made to ensure that the patent box regime applies to applicable rate of tax.

FTI Consulting Comment:
No changes to the main rate were expected, although it was interesting that the Chancellor commented that even at 19 percent, the UK Corporation Tax regime did not incentivise investment as effectively as in countries with higher headline rates.

[Last updated on 20 March 2023]

Capital Allowances
The Chancellor has announced the introduction of “full expensing” for three years from 1 April 2023, allowing companies to write off the full cost of qualifying plant and machinery expenditure in the year in which the investment is made.

The Budget report suggests that this change “will mean that the UK has the joint most generous capital allowance regime in the OECD with a Net Present Value (“NPV”) of 100%”.¹ The net estimated cost to the Treasury is £27 billion between 2022-23 and 2027-28, or £9 billion per year.

First Year Allowances
The introduction of “full expensing” is essentially a rebranding of the first-year allowances (“FYA”) introduced in the Finance Act 2021 within the existing framework in Capital Allowances Act 2001 (“CAA 2001”). A FYA of 100 percent will be available for main pool plant and machinery, and a FYA of 50 percent will be available for special rate pool plant and machinery, including long-life assets.

Notable points are:

The FYA will be available for expenditure incurred from 1 April 2023 to 31 March 2026, although the Government plans to make the change permanent when it is financially prudent to do so. We understand that full expensing will not be subject to a contract date rule as was the case with super-deduction. Instead, the usual “time when expenditure is incurred” rules will apply. Any expenditure incurred from 1 April 2023 will qualify for full expensing irrespective of contract date;
The FYA will only be available to companies subject to Corporation Tax;
The FYA must be claimed in the period in which the expenditure is incurred;
An FYA may be claimed on only part of the qualifying expenditure and the balance added to the relevant pool. In the case of special rate qualifying expenditure, FYA will be available at 50 percent and the balance added to the special rate pool qualifying for writing down allowances will be available at 6 percent per year;
The assets must be new and unused, and not second hand;
The general exclusions applicable to FYA mean that expenditure on assets for leasing and cars will not qualify, although as in the Finance Act 2021, FYA will be available for lessors of background plant and machinery; and
Where FYA is claimed and a company sells the asset, a balancing charge must be brought into account is equal to the disposal proceeds, again mirroring the Finance Act 2021 provisions. Where the asset in question is a fixture, it may be possible to mitigate the charge by making a CAA 2001, s.198 election.

Annual Investment Allowance
From April 2023, as previously announced, the Annual Investment Allowance (“AIA”) for plant and machinery will be permanently set at £1 million, simplifying the tax treatment of capital expenditure for 99 percent of businesses.

The rules that applied to “straddling periods”, i.e. accounting periods that began before and ended after one of the frequent changes in the amount of AIA, and had the potential to cause further complications, will be repealed.

Investment Zones
The Government has announced the future creation of twelve investment zones. Designated tax sites within each zone will benefit from enhanced tax deductions under the freeport provisions included in Finance Act 2021 s.113. FYA of 100 percent will be available for qualifying expenditure on plant and machinery and a 10 percent annual allowance will be available for qualifying expenditure on structures and buildings.

Electric Vehicle Charging Points
FYA at 100 percent for qualifying expenditure on electric vehicle charging points have, as previously announced, been extended to 31 March 2025.

FTI Consulting Comment:
The effective continuation of the FYA regime introduced in 2021 will be welcomed by businesses. Although the super-deduction at 130 percent has been replaced by FYA at 100 percent, the post-tax saving of £25 per £100 of expenditure remains unchanged because of the increase in the corporation tax rate from 19 percent to 25 percent. Indeed, the post-tax saving for 50 percent FYA expenditure has increased by over 30 percent.

The changes will be of less benefit to loss-making businesses, who will have to consider whether to claim FYA in the year the expenditure is incurred, or to treat the expenditure as additions to capital allowance pool and claim allowances over subsequent periods, taking into account the restrictions on carried forward losses.

Whilst the Treasury believes that “Larger businesses will benefit from full expensing for the next three years, simplifying claims and investment decisions”,² this does not necessarily stand up to scrutiny. For example, the disposal rules mean that a business will have to track assets on which FYA is claimed and it is not certain that FYA will be available after March 2026.

Research and Development Tax Incentives
The Spring Budget covered updates to previously announced changes to the R&D tax relief regimes which are set to come into effect for accounting periods starting on or after 1 April 2023, and introduced a more generous rate of relief for research intensive companies. There were no updates given in relation to the proposed merging of the SME and R&D Expenditure Credit (“RDEC”) schemes, which is still in the consultation phase.

The announcements and changes around R&D tax incentives were as follows:

The planned restriction for R&D activities undertaken outside the UK has been pushed back a year and will now come into force for accounting periods starting on or after 1 April 2024, subject to the outcome of the consultation on merging the SME and RDEC schemes. There were no changes to the conditions to be met to claim for qualifying overseas expenditure.
There will be a research intensity threshold brought in to provide an increased rate of relief for loss-making R&D intensive SMEs. For expenditure incurred from 1 April 2023, eligible companies will be able to claim £27 from HMRC for every £100 invested in qualifying R&D. To be eligible for the relief, expenditure on qualifying R&D must represent at least 40 percent of all expenses incurred by the group for the period with adjustments, to avoid double counting capitalised R&D.
The requirement for companies to submit an “Additional Information Form” along with its R&D tax relief claim will now be effective for all claims submitted or after 1 August 2023. Previously, this only applied for accounting periods starting on or after 1 April 2023. Companies will now need to provide additional details in relation to the claim which includes, amongst other disclosures:

— Amount claimed as “Qualifying Indirect Activities”;

— Number of projects claimed and a written overview of a minimum number depending on the number of projects being undertaken;

— PAYE reference for any externally provided workers included in the claim; and

— Each claim will need to be endorsed by a named senior officer of the company.

First time R&D claimants, or claimants who have not made an R&D claim in any of the previous three calendar years, must make a formal notification within six months after the end of the period of account that includes the relevant accounting period.
As announced previously, companies will now be able to include datasets and cloud computing costs in their R&D tax relief claims for accounting periods starting on or after 1 April 2023.

FTI Consulting Comment:
The Chancellor’s confirmation of additional financial support of up to 27p/£ for research-intensive technology and life sciences companies is very welcome and a vital step forward, but is still less than the 33p/£ they were previously entitled to. The uplift will be implemented through maintaining the payable credit rate at 14.5 percent (where it is 10 percent for non-qualifying companies). The rate of additional deduction will remain at the previously announced 86 percent for both research-intensive companies and those who do not qualify as such.

The 12-month deferral of the restrictions for overseas R&D is also very welcome, allowing companies time to plan and arrange their sourcing of R&D services accordingly.

The significance of this update is clear and follows from the rate cuts to SME R&D credits which were announced in the potentially damaging Autumn Statement, which had far-reaching implications for many high-growth early-stage companies. Following the Chancellor’s pre-Christmas announcement that he would be looking at potential remedies, we are grateful that the Government has listened to the sectors’ concerns and for the work that industry bodies have put into this.

The measures announced to counter abuse will be helpful, but fall short of fully tackling the issue of boundary pushing which we hope will be addressed under the new regime currently being consulted on. We are anticipating draft legislation early in the summer of 2023 and hope that this will result in a new regime that puts the UK unquestionably ahead in its competitiveness for being the location of choice for ground-breaking and lifesaving life sciences R&D.

Amendments to the Corporate Interest Restriction (“CIR”) rules
Following engagement with stakeholders last year, the Government are introducing changes to the CIR rules in order to address a number of unintended consequences, to ensure the rules operate more appropriately in certain situations and strengthen HMRC’s enforcement powers.

Whilst there are a significant number of changes to the regime with varying commencement dates, key changes include:

Ensuring a disallowance does not arise purely as a result of a mismatch between tax-interest and group-interest on an appropriation from trading stock to fixed assets;
Preventing a disallowance from arising due to a mismatch between tax-interest and group-interest on interest accrued prior to commencing a trade and a UK property business (for a non-UK resident company);
Extending the time period for HMRC to appoint a reporting company to four years from the ending of the accounting period (currently three years);
Removing the additional time to make group relief and capital allowances claims following a determination by HMRC when a group has failed to file an Interest Restriction Return;
Amendments to the public infrastructure rules to ensure that a building under construction for use in a property business qualifies for exemption, and to allow certain finance costs payable to third parties via an overseas group company to qualify; and
Ensuring changes to CIR disallowances are ignored when calculating penalties for inaccuracies in corporation tax returns.

FTI Consulting Comment:

Given the complexity of the CIR provisions and the fact that a number of shortcomings have been identified since the introduction of the rules in April 2017, we welcome the efforts by the Government to amend the rules to remedy unintended consequences and to ensure that the rules operate appropriately.

Conversely, whilst we acknowledge the rationale behind HMRC strengthening their enforcement powers, we consider that there is a missed opportunity for the Government to ease the compliance burden on taxpayers. This includes the opportunity to increase the timeframe for a group to nominate its own reporting company from one year to two years, especially as this was a measure lobbied for by many stakeholders in discussions with HMRC.

Transfer Pricing Documentation
The Government will introduce legislation in the Spring Finance Bill 2023 to require the largest multinational enterprises (global revenues of €750 million or more) operating in the UK to keep and retain transfer pricing documentation, namely a master file and local file, in accordance with the OECD’s Transfer Pricing Guidelines. This measure will apply to accounting periods beginning on or after 1 April 2023.

HMRC will continue to consult on a Summary Audit Trail (“SAT”), which would be a document detailing the steps undertaken by a UK business in preparing its transfer pricing documentation.

FTI Consulting Comment:
As expected, HMRC confirmed that their previous announcements in relation to transfer pricing remain unchanged.

The largest businesses should ensure that going forwards, their transfer pricing documentation is prepared in the master and local file formats whilst all businesses within the scope of transfer pricing should review their policies annually to self-assess their compliance with the arm’s length principle as part of their corporation tax return filing process.

We expect that HMRC will introduce the SAT requirement in the near future, further demonstrating HMRC’s increased focus on the quality, completeness and implementation of UK transfer pricing documentation.

OECD Pillar 2 and Top-up Tax
Following on from the comments at the Autumn Statement 2022, the Government have confirmed that they will implement the Income Inclusion Rule (“IIR”) for accounting periods commencing on or after 31 December 2023. Alongside this, there will be a Qualifying Domestic Minimum Top-up Tax (“QDMTT”) to ensure that both (1) any top-up tax related to UK operations with an effective tax rate of less than 15 percent will be paid in the UK rather than in the ultimate parent jurisdiction of the group; and (2) large wholly domestic groups are within the scope of the rules.

As previously announced, final legislation will be included in the Spring Finance Bill 2023, which will be released on 23 March 2023.

FTI Consulting Comment:
Given today’s announcements were a reiteration of the position announced in the Autumn Statement 2022, they provide no further comfort for businesses on any changes to the IIR from the draft legislation and the design of the UK’s QDMTT. As there is likely to be very little time between the enactment of Spring Finance Bill 2023 and the commencement of the rules on 31 December 2023, it is concerning that large proportions of complex legislation will not have been subject to consultation with stakeholders. As such, it is crucial that HMRC provides comprehensive guidance on the new provisions and, where possible, there is a soft landing for taxpayers with respect to compliance obligations and penalties.

Related Insights

2023 Spring Budget Analysis: Overview

2023 Spring Budget Analysis: Employment Tax and Reward

2023 Spring Budget Analysis: Real Estate

2023 Spring Budget Analysis: Life Sciences

1: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1142902/Web_accessible_Budget_2023.pdf, p.58

2: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1142902/Web_accessible_Budget_2023.pdf, p.62

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