Last week Jeremy Hunt unveiled his first Budget to a cautiously more optimistic reception than that of his predecessor Kwasi Kwarteng’s mini-Budget. However, although the Chancellor is emphasising that the UK is predicted to avoid a technical recession, there is still a heavy sense of wariness about what’s to come. For businesses, there were a number of key announcements impacting areas from corporation tax and capital allowances to “back-to-work” measures. Here’s our guide to the key takeaways from the Spring Budget 2023.
Corporation main rate tax to rise to 25% from April 2024
The biggest news, albeit already expected, was that main-rate corporation tax is intended to rise from 19% to 25%, beginning on 1st April 2024. Small profits rate will remain at 19%. As a reminder, the small profits rate is valid up to £50,000 and main rate from £250,000, with a “marginal relief” rate between the two, which is a scaled increase from the lower rate to the upper one.
Businesses with profits under £50,000, then, will see little change – but it will be a big increase for those in the main rate band. Hunt was at pains to emphasise that the rate remains the lowest among the G7 economies. The next-lowest, France, will still just scrape above the UK’s rise at 25.8%, according to the OECD.
Nonetheless, understanding the true impact of this is a little murkier. This is the headline rate – the “sticker” rate before you take off any deductions to get the effective tax rate. In headline terms, the rate increase is still low, but it is also seemingly trending towards a return to pre-Conservative levels.
However, various analyses, such as that by the Office for Budget Responsibility, show that even while the Government was significantly cutting corporation tax in headline terms, the effective tax rate in reality remained hardly changed between 2010 and 2018. From then onwards to forecasts until 2025, we see an upward trend largely in step with headline rates. With this in mind, the previous cuts did not make such an effective reduction as might have been thought, meaning that this increase is likely to be more weatherable than it might seem to be on the surface.
Multinational and domestic top-up taxes to come into force
The catchily named G20-OECD Pillar 2 Framework might have slipped under the radar for many, but it’s an important announcement for the very largest of cross-border businesses. The Government has agreed to include the requirements of this global agreement in its coming Spring Budget legislation, meaning that UK-headquartered multinationals with profits of over €750 million will need to pay a top-up tax if their operations in another jurisdiction are enjoying an effective tax rate of less than 15%.
Likewise, for those operating exclusively in the UK, a top-up tax will also be implemented where the effective tax is again lower than 15%.
This might seem irrelevant to the average-sized business, but it is an interesting step further in the direction of governments working together to harmonise what they see as the tax challenges from the digital economy. Where digitisation has made it even easier for companies large and small to shift work between advantageous jurisdictions, governments have previously been slow to catch up. Could we see this trend extend further down the size scale in future years?
Full expensing allowance confirmed for at least three years
Next up in the Spring Budget’s headline-makers was the news that the full expensing allowance (FYA) would be introduced from 1st April 2023 until 31st March 2026. This is a policy whereby companies who are liable for corporation tax can invest in new plant and machinery and in return deduct 100% of the cost of doing so from their pre-tax profits. Tax payable will therefore be reduced by 25p for every pound invested.
This will be welcomed by a whole range of businesses given the wide scope of the policy, including everything from office equipment like computers, chairs and desks, through to construction vehicles and tools like bulldozers and excavators.
Meanwhile, a 50% FYA will also be made available for so-called “special rate assets”, like solar panels or thermal insulation. The Chancellor has stated that his ambition is to make this permanent, although this will all depend on political headwinds in the coming years.
Refocused investment zones aim to accelerate growth
The Government has already pursued a policy of pushing to accelerate certain areas with its freeport strategy. Hunt’s latest step along these lines will see 12 investment zones across the UK created, with attractive benefits for companies setting up or working in these areas.
While those under the authority of the devolved administrations may have a slightly different policy offer, in England the package particularly helps businesses putting down roots. It includes 100% relief from business rates on newly occupied premises and on stamp duty or land tax for land and buildings bought for commercial use. It also offers zero-rate National Insurance relief for employers’ contributions on employee earnings of up to £25,000.
The message here seems to be that this is a key push for small and medium businesses, from NIC relief on “normal” salaries to business rate relief on new sites – often a key bugbear of small business owners. On the other side of the coin, the Investment Zones themselves will be able to retain a significant portion of the business rates they do collect for 25 years, which should help to stimulate something of a circular growth model.
Free childcare to expand in “back-to-work” push
Childcare costs in the UK represent 30% of the average two-child couple’s wage, making it a key factor in underemployment. The Spring Budget 2023’s measures to tackle this include expanding free childcare provisions to all working parents of children over the age of nine months. This does, however, come at a resource cost, so the number of children a childcare professional can look after will rise in England to five, as in Scotland. Finally, the Treasury will provide local authorities with increased funding for wraparound care outside of school hours.
The Children’s Commissioner has welcomed the move as an “important step”, and it will likely prove important for businesses both to allow continuity of their workforce with young families and to gain greater access to skilled labour, particularly female, who wish to re-enter the workforce but have found it so far financially disadvantageous to do so.
Is there light at the end of the tunnel for businesses?
As we said at the beginning, it’s been a cautiously optimistic Spring Budget for many, including businesses. Headline measures like an increase in corporation tax may perhaps be softened by effective figures, while a back-to-work push could prove a significant boon for employers and employees alike.
Nonetheless, with significant uncertainty in the global economy, it doesn’t yet seem to be a fast road to recovery – and with political polling consistently showing a Labour majority or plurality, it can feel that there is an element of biding time until the next election where we may see significant policy swings. With so much unpredictability, it’s crucial for any business to keep any cost areas they can control absolutely watertight, including exposure to foreign exchange markets. To find out how your company can protect its cross-border capital, read our article about how to create an FX risk management strategy or get in touch with our dedicated team.
Alexander is a writer specialising in foreign exchange and finance for companies with cross-border exposure. He’s written on topics including currency risk, international taxation and global employment for seven years. You can find him out hiking, travelling and working from Spain in the sunnier months.