They think it’s all over… it is now! Jeremy Hunt has delivered his first Budget as Chancellor, and we are here to look at some of his moves, his plays, and to determine whether he scored any own goals. As a Derby County fan, Iain is used to disappointment, and this wasn’t the most exciting Budget in the world, but it still had some smooth moves to get the crowd buzzing.
We always like to keep abreast of current affairs here at Claritas, and long-time readers of our Budget roundups will know we like to inject a little humour wherever possible. Still, it remains to be seen whether we can shoehorn sufficient football puns into this mailer or whether we will have to draw the Line(ker) somewhere.
While we haven’t included the boring action replays, we like to think that these are the highlights, the things that matter to you, as well as the things you might have missed.
Our round up of the action includes injury time tweaks to R&D tax credits, a cracking save in respect of personal pension funds (and penalty tax charges) as well as some of the little kicks, flicks and back passes hidden in the small print.
As ever, if you would like further information on any of today’s announcements please do get in touch with your normal Claritas contact or email us on firstname.lastname@example.org. For all we know, a certain crisp vendor might also be waiting to give us a post-match interview…
What are the changes?
The Chancellor confirmed that changes to R&D relief for SMEs originally announced in the 2022 Autumn Statement will be implemented. No overturn by VAR here. Those changes reduce the enhanced relief for SMEs on qualifying R&D expenditure from 130% to 86%, and the tax credit rate from 14.5% to 10%. Mr Lineker will barely have time to sit back in his MOTD presenting chair before these changes take place – they come in from 1 April 2023.
However, it was a budget of two halves for R&D. More positive news followed when it was announced that R&D intensive SMEs will be eligible for additional R&D tax relief. An R&D intensive SME will be a loss-making company whose R&D expenditure constitutes at least 40% of total expenditure. These companies will be eligible to claim the existing 14.5% credit instead of being relegated to the 10% league. Unfortunately, the 14.5% credit is based on the new, less generous enhancements, meaning that it is now worth 27% of expenditure rather than the previous 33.3%. A consolation goal rather than an equaliser or winner, but at least something for some of the crowd to feel less readily salty about.
Finally, overseas expenditure will be going into extra time. Previously announced rules on new restrictions for overseas expenditure will now take effect from 1 April 2024 instead of 1 April 2023. The new rule is that subcontracted R&D activity will need to be performed within the UK, and externally provided workers will need to be subject to UK PAYE, in order for the expenditure to be eligible for R&D relief.
What does it mean for me?
Well, if you are a qualifying research intensive company, it looks like a partial victory has been snatched from the jaws of defeat and you will continue to benefit from R&D credit at the higher, 14.5% rate. You may at least feel that you have “won the second half” after being 3-0 down at half time. For those companies who may be close to the 40% expenditure limit, it may be worth some post-match analysis to see whether you can spend a little more to earn a credit at the higher rate.
Similarly, for those unable to make their substitutions to UK based R&D activity, an extra year’s grace may mean that accelerating this expenditure while it still qualifies for relief becomes the winning goal.
What are the changes?
As widely reported (much like some elderly ex-sportsman’s tweets), pension changes were the big story in today’s Budget. Couched as a fervent desire to prevent doctors from retiring too early with fully-funded pension pots, the move to abolish the lifetime allowance will also appeal to traditional Conservative voters who were facing substantial charges where their pension pots exceed the limit.
The extension of the annual allowance from £40,000 to £60,000 will also be celebrated as a win for many who are seeking to build up their pension pot, particularly now that the lifetime allowance cap will not limit the amount of benefits they can score at the end.
One thing that was not mentioned in the Chancellor’s speech is the associated amendments to the 25% tax free lump sum. While this was restricted to 25% of the level of the lifetime allowance limit (currently £1,073,100), the removal of the cap does not increase this limit. This means that the maximum tax-free cash that can be withdrawn from the fund will remain at £268,275 (unless an earlier protection applied) and will therefore no longer represent 25% of the full fund.
The changes take place from 6 April 2023.
What does it mean for me?
The increase in the contribution limit to £60,000 will allow greater scope for contributions, but there are also threshold income levels to tackle. Currently the adjusted income above which the annual allowance limit is tapered is £240,000 (which includes employer contributions) and this will increase from 6 April 2023 to £260,000. Additionally, the minimum allowance after tapering is currently £4,000 and this will be increased to £10,000. The same figures also apply to the Money Purchase Annual Allowance, which restricts the amount of tax relievable pension savings after accessing a pension flexibly.
In practical terms, therefore, the upper limit for adjusted income figures before the annual allowance reached the maximum restriction was £312,000; this limit will be reached at £360,000 for the 2023/24 tax year onwards. About a week’s wages for a Premier League footballer.
Pensions are actually very Inheritance Tax -efficient savings vehicles. Where individuals don’t need to draw on pension sums these can be passed down to family members free of any IHT, and the removal of the lifetime limit will mean that greater amounts of wealth can be stored in a tax-advantageous environment and passed on without any loss of value owing to tax.
The Chancellor has announced ‘full expensing’ for some types of plant and machinery. This move was widely predicted – in large part because the Treasury themselves leaked it last week – a bit like Grealish’s move to Man City last season.
Full expensing means that the total cost of the qualifying asset can be offset against tax in the year it was bought, which might mean that Manchester United could have written off the cost of Ronaldo, if he was considered an ‘asset’. This will go some way to easing the impending Corporation Tax rate increase, and provides an effective 25% cut in the cost of investments. Special Rate assets, such as solar panels and other plant integral to a building, are given a 50% first year allowance, effectively continuing the temporary SR Allowance that ran in parallel to the Super-Deduction.
Full expensing and the 50% Special Rate FYA will be with us for the next three years, with the Chancellor stating his “intention to make it permanent as soon as we can responsibly do so”. The Shadow Chancellor has also previously indicated a support for investment incentives, so it feels reasonable to assume that these policies are here to stay.
Twelve new Investment Zones have been announced, in a ‘refocussing’ of an existing policy. Locations are intended to be spread across the UK, with a commitment to provide at least one IZ in each of Scotland, Wales and Northern Ireland. We will know final locations by the end of 2023.
Each IZ will be able to choose its own mix of tax relief and grant funding. The tax reliefs available to IZs are aligned with those in Freeports so the two programmes can work coherently alongside each other.
Annual Investment Allowances
The sole unscathed survivor of the KamiKwaze mini budget has been restated by Jeremy Hunt, providing 100% first-year relief for plant and machinery investments up to £1 million.
Other useful things taken away from the Budget
Small trusts and estates
While footballers earn silly amounts of money (and certain ex-playing pundits don’t do too badly for themselves either), not everyone has millions to stash away in a trust, notwithstanding the significant IHT benefits this can generate.
In another small print special, the Chancellor has also changed the income tax treatment for small trusts. Currently, a trust (or estate) with savings income where the tax liability is under £100 does not have to pay income tax. For trusts with income up to £1,000, they do not have to pay trust rates on income tax (45% on income and 39.35% on dividends) but their liability is limited to the basic rate equivalents, namely 20% or 8.75%.
With effect from 6 April 2024, there is a new de minimis level on all income of £500, although this limit is divided by the number of (broadly only discretionary) trusts settled by the same settlor (if applicable) down to a minimum of £100. However, in the spirit of giving with one hand and taking with another, the £1,000 low tax limit is also abolished, meaning trusts will pay full rates of income tax on any income that exceeds the £500 de minimis.
Geographical restriction to IHT reliefs
Although Brexit is old news, the implications of the withdrawal from the EU is still filtering through in tax law. One, seemingly small measure that will be included in Finance Bill 2023/24 is the restriction of IHT relief on agricultural property and woodlands to land within the UK only with effect from 6 April 2024.
While this might not seem a big change, this was one of the areas in which the UK was forced to change its domestic legislation to fall in line with EU law as a number of reliefs were restricted to the UK only which was contrary to the EU principle of free movement of capital within the common area. This change may have a narrow impact currently, but other reliefs may soon follow, including amending the rules for things like Furnished Holiday Lettings, as we re-establish our sovereign borders.
If you do have qualifying land abroad that may qualify for IHT relief under the current rules, it may be worth considering whether any action is appropriate before next April.
Crypto to make it onto the tax return
Cryptoassets are the next big thing, bit like Jude Bellingham, but in the UK, there are no crypto-specific rules, we just use the existing income tax and capital gains tax rules to capture the tax liability arising. Income tax can arise on things like mining, or creating NFTs as a trade, but perhaps more commonly arises where staking cryptoassets. Gains can arise whenever a cryptoasset is sold or converted, even if this is not into GBP or other fiat currency.
However, from 2024/25 returns onwards, HMRC will seek to specifically capture crypto information separately on a return, rather than these amounts being included within other income or gains. It looks like Crypto has finally made the Premier League!
Increased focus on tax collection
HMRC have been allocated additional funding of £47m to boost their tax collection capabilities. Unsurprisingly, following two ears (sorry, years) of lockdown leniency on tax collection, HMRC now want to distinguish between those who can’t afford to pay and those who choose not to. For the former category, there will be an enhancement of the online “Self-Serve Time To Pay” service. For the latter category, expect a much more aggressive ramp-up in chasing activity.
As ever, the risk is that HMRC may not be able to distinguish properly between the two groups and may push some marginally viable businesses into insolvency. And the recent rule changes giving HMRC preferential creditor status for some categories of tax debt may give them more incentive to do so than previously.
Multinational top-up tax
As previously announced, large multinational groups (revenues above €750m) are to be subject to a minimum 15% rate of tax, from 2024. Where the effective rate would otherwise be less than 15%, a UK group parent company or intermediate holding company may be subject to a top-up tax to bring the effective rate back up to 15%.
This is part of an OECD-wide initiative (“Pillar 2”) designed to combat perceived aggressive tax planning by some multinationals to shift profits to low/no-tax jurisdictions.
Just as football keeps evolving (see the never-ending debate about how modern footballers compare to the stars of the 80s), the EMI rules are the recurring focus of legislative changes. The Budget has made some minor ‘refinements’ to the process for granting EMI options in the name of simplicity. For options granted from 6 April 2023, it will no longer be necessary for option agreements to include a list of restrictions that apply to the option shares. The requirement to include confirmation that the employees being granted options have signed a working time declaration will also be removed. Option agreements would generally include these details as standard. Their omission, however, could inadvertently lead to options not being qualifying options for EMI purposes – or at the very least cause problems when the employing company is subject to due diligence.
In addition, from 6 April 2024, the grant of options will need to be reported to HMRC by 6 July following the end of the tax year in which they are granted. This replaces the current 92 day reporting deadline. Although this will extend the deadline for reporting the grant in most cases, it perhaps also leads to the risk of the reporting being overlooked – after all, the longer there is to do something, the more likely it is to be forgotten. Where this happens, the options will not qualify for EMI purpose (unless an appeal can be made to HMRC’s more lenient side) – a real ‘own goal’ in other words.
The world of tax is constantly changing, so keep up to date on all our news, views and opinions
6 December 2023
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