2022 Spring Statement Analysis
With the headwinds of the escalating cost of living, together with the Ukraine crisis and sanctions on Russia, there was less headroom than might have been anticipated for the Government to begin to lay down the fiscal foundations for the next election.
Tax was the surprise centrepiece for the Chancellor’s Spring Statement with the publication of a three part tax plan looking to: i) address the rising cost of living, ii) provide stimulation for investment in capital, people and ideas and iii) share growth. Below we have set out the key policy measures that have been announced together with our views on the implications.
Expected reduction in the basic rate of income tax
The Chancellor has announced that the basic rate of income tax will be reduced from 20% to 19% from April 2024, but only if specific fiscal principles are met.
The reduction in basic rate tax, if it comes to fruition, will be welcomed by almost all income taxpayers. However, the current freeze of the personal allowance and rate band thresholds is likely to result in many more people paying the basic rate and higher rate of income tax, potentially negating much of the impact.
National Insurance Contributions and the Health and Social Care Levy
The Chancellor announced that the Health and Social Care levy will be implemented as planned, including the preceding increase in National Insurance Contributions (“NIC”) from 6 April 2022.
As previously announced, an additional 1.25% will be added to the NIC rates for both employed and self-employed individuals (Class 1 (primary and secondary), Class 1A, Class 1B and Class 4 NICs) from 6 April 2022.
From 6 April 2023, NIC rates will return to normal and the Health and Social Care levy of 1.25% will become a stand-alone levy charged on earnings from employment and profits from self-employment.
However, the Chancellor also announced that the primary threshold for Class 1 NIC (i.e. the level from which employees start paying NIC) will be raised from 6 July 2022. Currently the primary threshold is £190 per week and will be increased to £242 per week, equating to £12,570 per annum (up from £9,880 per annum) – equal to the current tax free personal allowance for income tax purposes. The Chancellor stated that this change should mean a reduction in employee NIC for around 70% of employees currently paying National Insurance.
For future years, the intention is that the primary threshold remains in line with the personal allowance for income tax purposes.
It should be noted that the Secondary Threshold (i.e. the point at which employers start paying Class 1 NIC) will not rise.
The rise in the primary threshold will be welcome news for employees and will go some way to offsetting the additional 1.25% added to NIC paid by employees, but many employees will still be worse off in the coming year. Although the threshold will remain pegged to the personal allowance for income tax purposes, given that this has been frozen for forthcoming years and with high inflation, many employees will continue to feel poorer.
With no change to the previously announced increase for employers, many businesses will be disappointed, especially when combined with the impact of inflation and the current job market already creating pay related pressure.
Employment allowance increase
The employment allowance will be raised to £5,000 per annum from 6 April 2022 (currently £4,000). This is the amount an eligible employer (those with total NIC liabilities in the previous tax year of under £10,000) can claim as a reduction on their total secondary National Insurance Contribution bill.
Although this is likely to be helpful for businesses, many will still struggle to see the benefit of a £1,000 reduction at a time when the employer National Insurance Contributions rates are rising, as previously announced. It remains important for companies that are part of a group (or that are private equity backed) to carefully check if they are eligible.
Other employer announcements
It was announced that the Government will also look at a further review of incentives in the private sector, including how the Apprenticeship Levy functions (which is a charge on employers with broadly a pay bill of £3 million or more and which provides a funding source for apprenticeships).
In addition, the Government confirmed that their review of the Enterprise Management Incentive (EMI) scheme (announced in the 2020 Budget) has concluded and that, in their view, the tax-advantaged share scheme remains effective and will not change. However, an additional review will be opened to look at other tax-advantaged schemes, such as the Company Share Option Plan (CSOP) which can be particularly helpful for businesses that have outgrown EMI.
The review of incentives for private businesses may prove helpful in ensuring that the UK remains a competitive place to base a business and hire employees.
It is however disappointing that the conditions for EMI schemes were not widened, but the tax reliefs available for those companies that do qualify remain very generous in a global context.
Options for changes to the capital allowances regime
To encourage investment in capital assets, changes to the capital allowances regime are being considered. This might follow after the current temporary first year allowances of a 130% super-deduction for new main pool plant and machinery additions, and 50% First Year Allowance (“FYA”) for new special rate pool additions end for expenditure incurred from 1 April 2023. A number of options have been suggested:
- Increase the permanent level of the Annual Investment Allowance, for example to £500,000. At its peak, this could cost around £1 billion in a single year.
- Increasing Writing Down Allowances (“WDA”)for main and special rate assets from their current levels of 18% and 6% to 20% and 8%. At its peak, this could cost £2 billion in a single year.
- Introduce a FYA for main and special rate assets where firms can deduct, for example, 40% and 13% in the first year, with the remaining expenditure written down at standard WDA. At its peak FYAs of 40% and 13% could cost £3 billion in a single year.
- Introduce an Additional FYA, to bring the overall amount that can be claimed to greater than 100% of the initial cost. An additional capital allowance of 20% in the first year, on top of standard WDAs on 100% of the initial cost across the first and subsequent years. This would spread relief over time, while giving relief on over 100% of the initial capital cost. At its peak, an additional allowance of 20% could cost over £4 billion in a single year.
- Introduce full expensing, to allow businesses to write off the costs of qualifying investment in one go. No other country in the G7 has implemented this on a permanent basis. Full expensing of plant and machinery could cost significantly more than the above options. At its peak, this could cost over £11 billion in a single year.
Enhancements to the tax depreciation regime are expected to be welcomed by businesses. However, to make a real impact it will be important that improvements to both the amount and timing of tax relief available under the capital allowances regime will be of value to all businesses.
It is not unusual for a government to cut and reform taxes on capital investment to help deliver policy objectives and it will be vital to engage with business leaders to ensure changes made have a positive impact on investment decisions being taken.
Research & Development Allowances
The Government is keen to support businesses to invest more in R&D and recognises that the UK’s R&D tax reliefs are key to supporting this area.
Whilst a series of measures to improve the RDEC regime have been put forward, changes have not yet been proposed for the Research & Development Allowances (“RDAs”) regime.
A review of R&D tax reliefs is continuing and further announcements will be made in the Autumn Budget 2022.
Businesses were keen to engage in the R&D Consultation undertaken in 2021, in which there was support for a payable tax credit for expenditure qualifying for RDAs akin to the RDEC scheme.
FTI Consulting have been making the case for this for a number of years and, in more recent discussions with HM Treasury, there has seemed to be an increasing level of interest. We are of the view that this should stimulate new investment that would not otherwise be made in the UK and it will be interesting to see whether the Government acts upon this.
Reform to tax reliefs and allowances
The Government has reiterated that the tax system should be simple, efficient, fair and sustainable and will continue to consider reform to capital allowances and R&D tax reliefs from April 2023.
The Government will engage with businesses and confirm plans at the Autumn Budget later this year.
This is not the first time that reform of the capital allowances regime has been considered and it will be interesting to see the announcements in the Autumn Budget 2022.
There were a number of announcements around R&D incentives including:
- The Government will consider increasing the generosity of RDEC to boost R&D investment in the UK and, in doing so, rebalance the schemes and make RDEC more internationally competitive.
- All cloud computing costs associated with R&D, including storage, will qualify for relief without the limitations suggested in the Autumn Budget 2021.
- As announced in the Autumn Budget 2021, there will be a restriction for activities undertaken outside the UK from April 2023 (we understand that this will apply to accounting periods starting on or after 1 April 2023). However, the Government announced that overseas R&D activities can continue to qualify where there are:
– Material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research – for example, deep ocean research;
– Regulatory or other legal requirements that activities must take place outside of the UK – for example, clinical trials.
- The definition of R&D for tax reliefs will be expanded by clarifying that pure mathematics is a qualifying cost.
- There will be further evaluation for what more can be done to tackle the abuse of R&D tax reliefs, particularly in the SME scheme, ahead of Budget 2022.
We expect to see draft legislation for the measures coming into force in April 2023 later this year and also expect further announcements in the full Autumn Budget 2022.
The Government are continuing to review R&D tax reliefs in a process that has been ongoing for a number of years. There were concerns that the Chancellor may be reassessing the relative generosity of the SME regime, but the focus seems to be more on enhancing RDEC.
FTI Consulting has been heavily involved in making the case for exceptions from the general exclusion for R&D which is undertaken overseas out of necessity and so the announcement is very welcome. However, much will depend on how these conditions are defined and the related evidence that would be required. Further changes to the regimes will, inevitably, introduce further complexity. The general exclusion of overseas R&D should mean that the PAYE/NI cap on SME credits is no longer needed and we have already been making the case for these rules to be rescinded.
The Government is also investing £161m to increase compliance and debt management capacity in HMRC. A likely consequence of this is that we expect to see an increase in the level of enquiries on R&D tax compliance in the coming years.
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