Spring Budget 2023 – automotive sector - Forvis Mazars

Chancellor Jeremy Hunt’s Budget speech yesterday centred on economic growth. He commented on how the economy and public finances have proved more resilient than expected in the Office for Budget Responsibility’s (“OBR”) November 2022 forecast, with the OBR’s latest forecasts showing that inflation will more than halve this year, that the economy is on track to avoid recession with GDP higher and debt falling in the medium term. Against this backdrop, the Chancellor was pleased to be able to announce a Spring Budget aimed at delivering growth by boosting business investment and labour market activity.

From a VAT perspective, there has been no change to the cost of buying or fuelling EVs. With VAT being charged at the standard rate on sales of all vehicles, the government has not provided any particular incentive to encourage EV sales, such as the application of a reduced rate or the zero rate. In addition, the disparity in the VAT applied to charging EVs remains, in that those able to charge their EVs at home benefit from the reduced rate of 5% on the cost of their electricity, whilst consumers who have to charge up elsewhere will continue to pay VAT at 20%.

Although the Budget included an extension of the 100% first-year allowance for qualifying expenditure for EV charge-points by two years to 31 March 2025, the industry was hoping for larger scale support to enable it to keep pace with the US and rest of Europe markets.

Other measures that may impact the Automotive Sector, either directly or indirectly, include the following:

Enhancements to R&D regimes

Larger companies under the Research and Development Expenditure Credit (“RDEC”) regime will benefit from the uplift to a 20p taxable credit for every £1 spent from 1 April 2023. The rate of SME R&D credit was to significantly reduce from 1 April 2023 falling from a potential cash back of 33.35% for every £1 spent on qualifying R&D to 18.6%. However, for those companies within the SME category which are R&D intensive (i.e. who spent 40% of their total expenditure on R&D) then the cash benefit is 27%.

There will be ongoing consultation on whether the two UK R&D schemes should be merged, and as part of those continuing consultations, the planned restriction of R&D tax credits to UK based research is being deferred by a year until 1 April 2024.

Changes to capital allowances

The proposed changes to capital allowances will benefit companies of all sizes, the £1 million annual investment allowance will be permanent from 1 April 2023 which will mean capital plant or machinery expenditure for most businesses will be relieved in the year in which that is incurred. In addition, there will be a 100% first year allowance for main pool capital allowance expenditure and 50% first year allowance for special rate pool expenditure for the next three years and potentially beyond.

Launch of the Investment Zones Programme

New private sector investment will be encouraged through the launch of the Investment Zones Programme, which will catalyse 12 high-potential knowledge-intensive growth clusters across the UK. Each cluster will drive the growth of at least one key future sector, including advanced manufacturing, bringing investment into areas which have underperformed economically. English Investment Zones will have access to interventions worth £80bn over five years, including a single five-year tax package for businesses in Investment Zones and grant funding to address local productivity barriers.

Help to get people back into work

As part of a comprehensive plan to help get people back into work and extend their working lives, there were a number of significant announcements introducing reforms to childcare, a new “Returnerships” apprenticeship, plans to tackle leading health causes keeping people out of work and a new migration package to attract international talent. This is a positive announcement which could help to tackle the skills shortage seen across the Automotive Sector.

Other tax highlights

As expected, the already enacted increase in corporate tax to 25% will go ahead from 1 April 2023.

In an obvious contrast with the lack of announcements on EV investment, fuel duty will be frozen at the current level for the next 12 months, including keeping the 5p cut in place.

Over £200m will be allocated to a Potholes Fund, enabling local authorities in England to fix up to 4 million additional potholes across the country, complete resurfacing projects and invest in major repairs and renewals, which should certainly please motorists and indirectly their suppliers.

The Multinational and Domestic Top-Up Taxes previously announced in response to the OECD’s Pillar 2 have been confirmed and will apply to accounting periods beginning on or after 31 December 2023.

It was also good to hear advanced manufacturing directly referenced as being earmarked for government support as a sector of the future. The new Government Chief Scientific Advisor will oversee a review into it with further policy announcements expected to follow once her recommendations have been considered.

With a Budget disappointing in terms of its focus on the EV sector and charging infrastructure, attention will now turn to the UK government’s commitment to the transition to Net Zero by 2050. The government intends to set out further actions on this later this month - it remains to be seen whether and to what extent that will include the investment in the EV sector which the industry is looking for.