Corporation tax rates
The expected increase in the rate of corporation tax for many companies from April 2023 to 25% will go ahead. This means that, from April 2023, the rate will increase to 25% for companies with profits over £250,000. The 19% rate will become a small profits rate payable by companies with profits of £50,000 or less. Companies with profits between £50,001 and £250,000 will pay tax at the main rate reduced by a marginal relief, providing a gradual increase in the effective corporation tax rate.
- Bank corporation tax surcharge changes will proceed, meaning that from April 2023 banks will be charged an additional 3% rate on their profits above £100 million.
- From April 2023 the rate of diverted profits tax will increase from 25% to 31%.
The super-deduction regime, which gives a 130% enhanced first year allowance (FYA) to companies on the purchase of qualifying plant and machinery, comes to an end on 31 March 2023. Instead, the government has announced Full Expensing, a 100% FYA, which allows companies to deduct the cost of qualifying plant and machinery from their profits straight away with no expenditure limit. Qualifying expenditure will include most plant and machinery, as long as it is unused and not second-hand, but will not include cars. Full Expensing will be effective for acquisitions on or after 1 April 2023 but before 1 April 2026.
A 50% FYA for other plant and machinery including long life assets and integral features (known as special rate assets) will operate along similar lines.
Full Expensing and the 50% FYA are only available for companies and not for unincorporated businesses.
The Annual Investment Allowance (AIA) is available to both incorporated and unincorporated businesses. It gives a 100% write-off on certain types of plant and machinery up to certain financial limits per 12-month period. The limit has been £1 million for some time but was scheduled to reduce to £200,000 from April 2023. The government has announced that the temporary £1 million level of the AIA will become permanent and the proposed reduction will not occur.
The government will also extend the 100% FYA for electric vehicle charge points to 31 March 2025 for corporation tax purposes and 5 April 2025 for income tax purposes.
The AIA amounts to full expensing for 99% of businesses. The long-term ambition is to make Full Expensing and the 50% FYA permanent.
Research and Development (R&D) relief
For expenditure on or after 1 April 2023, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20% but the small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86% and the SME credit rate will decrease from 14.5% to 10%. A higher rate of SME payable credit of 14.5% will apply to loss-making SMEs which are R&D intensive. To be R&D intensive the ratio of the company's qualifying R&D expenditure must be 40% or above the company's 'total expenditure' for the period. This equates to a receipt of £27 for every £100 of R&D expenditure.
Other announced changes to the R&D regime include expanding qualifying expenditure to include the costs of datasets and of cloud computing. All claims for R&D reliefs will have to be made digitally and be accompanied by a compulsory additional information form. Companies will also need to notify HMRC that they intend to make a claim within six months of the end of the period of account to which the claim relates, generally if they have not made an R&D claim in the previous three years. These changes apply to claims in respect of accounting periods which begin on or after 1 April 2023 apart from the additional information form, which will be required for claims made on or after 1 August 2023.
The restriction to relief on overseas expenditure, designed to refocus support towards UK innovation, will now come into effect from 1 April 2024 instead of 1 April 2023.
The increase in the RDEC rate means the UK now has the joint highest uncapped headline rate of tax relief in the G7 for large companies.
The government is currently considering responses to a consultation on merging the RDEC and SME schemes and expects to publish draft legislation for technical consultation in the summer.
Making Tax Digital (MTD) for income tax
The MTD regime is based on businesses being required to maintain their accounting records in a specified digital format and submit extracts from those records regularly to HMRC. In what appears to be a never-ending story, the government has announced a further delay in MTD for income tax self assessment (ITSA).
The mandation of MTD for ITSA will now be introduced from April 2026, with businesses, self-employed individuals and landlords with income over £50,000 mandated to join first, a change from the original £10,000 limit.
Those with income over £30,000 will be mandated from April 2027.
The government will also review the needs of smaller businesses and look in detail at whether the MTD for ITSA service can be shaped to meet the needs of smaller businesses.
Following the new approach, the government will not extend MTD for ITSA to general partnerships in 2025.
HMRC has previously announced that MTD for corporation tax will not be mandated before 2026. This now looks even further away.
Accounting periods that are not aligned to tax years
As part of the MTD project, changes have been made to alter the rules under which trading profits made by self-employed individuals and partnerships are allocated to tax years.
The changes mainly affect unincorporated businesses that do not draw up annual accounts to 31 March or 5 April. The transition to the new rules will take place in the 2023/24 tax year and the new rules will come into force from 6 April 2024.
Affected self-employed individuals and partnerships may retain their existing accounting period but the trade profit or loss that they report to HMRC for a tax year will become the profit or loss arising in the tax year itself, regardless of the chosen accounting date. Broadly, this will require apportionment of accounting profits into the tax years in which they arise.
A business draws up accounts to 30 June every year. Currently, income tax calculations for 2024/25 would be based on the profits in the business' accounts for the year ended 30 June 2024. The change will mean that the income tax calculations for 2024/25 will be based on 3/12 of the profits for the year ended 30 June 2024 and 9/12 of the profits for the year ended 30 June 2025.
This change will potentially accelerate when business profits are taxed but transitional adjustments in 2023/24 are designed to ease any cashflow impact of the change.
An estimated 93% of sole traders and 67% of trading partnerships draw up their accounts to 31 March or 5 April and the proposed changes will not affect them. Those with a different year end might wish to consider changing their accounting year end to simplify compliance with the tax rules.
Simplification measures for small businesses
The government is introducing a number of simplification measures to the tax system for small businesses with the aim of encouraging growth by reducing the administrative burden.
The announcements include changes to IT systems to allow tax agents to payroll benefits in kind on behalf of their clients and simplifications to the customs import and export processes.
Further consultations were launched which may lead to additional reforms including expanding the use of the cash basis. Proposed changes in the consultation include:
- increasing the thresholds so that more unincorporated businesses would be eligible
- making it the default for eligible businesses
- relaxing the restrictions on interest costs and loss reliefs.
An Investment Zones programme is being launched to encourage investment in 12 high-potential knowledge-intensive growth clusters across the UK. It is expected that eight sites will be in England and four across Scotland, Wales and Northern Ireland.
A five-year tax package will allow businesses located on special tax sites within Investment Zones to benefit from a number of tax reliefs including Stamp Duty Land Tax relief, enhanced capital allowances, structures and buildings allowances and secondary Class 1 NICs relief for eligible employers.
The UK and Scottish governments have jointly announced that Inverness & Cromarty Firth and the Firth of Forth are the two locations for Scotland's Green Freeports. The two winning bids will be supported by up to £52 million in start-up funding and will benefit from tax reliefs and other incentives through a combination of devolved and reserved powers.
Following bids in Wales, a Welsh Freeport is also expected to be announced during Spring 2023. Eight Freeports already exist in various locations in England.
Freeports are special areas within the UK's borders where different economic regulations apply. They are part of the government's work to 'level up' and boost economic activity across the UK. The aim is to create innovative hubs, boost global trade, attract inward investment, and increase productivity.
Seed Enterprise Investment Scheme
From April 2023, companies will be able to raise up to £250,000 of Seed Enterprise Investment Scheme (SEIS) investment, a two-thirds increase. To enable more companies to use SEIS, the gross asset limit will be increased to £350,000 and the age limit from two to three years. To support these increases, the annual investor limit will be doubled to £200,000.
Tax treatment of payments to farmers under the lump sum exit scheme
As part of the transition to a new agriculture policy in England, the government announced in November 2020 that it planned to:
- In 2022, offer farmers who wish to exit the industry the option of taking a lump sum payment in place of any further Direct Payments.
- In 2024, 'delink' Direct Payments from the land for all farmers. This means that recipients will no longer have to farm the land to receive the payments.
Payments received under the Basic Payment Scheme are generally taxable as receipts of a trade. Legislation will be introduced to ensure that payments received under the Lump Sum Exit Scheme which relate to an eligible claim are neither receipts of a trade nor miscellaneous income. This will allow the payments to be treated as the proceeds from the disposal of a chargeable asset, as is currently the case when Basic Payment Scheme entitlements are disposed of. In the case of a company receiving Lump Sum Exit Scheme payments, the payments will be treated as the proceeds from the disposal of an intangible asset.
Other announced changes include:
- The reform of film, TV and video games tax relief to give expenditure credits instead of an additional deduction from 1 April 2024.
- Extending the temporary higher headline rates of relief for Theatre Tax Relief, Orchestra Tax Relief and Museums and Galleries Exhibitions Tax Relief (MGETR) for two years to 31 March 2025.
- Extension of the period for which MGETR will be available for a further two years to 31 March 2026.