The cut and reform of business taxes - Spring Statement 2022

Capital investment 

One of the ways the government is considering driving this growth is through improving the tax benefits of capital investment through a review of the current capital allowances regime. This is a long-standing weakness of the UK economy compared to its peers and has resulted in lower productivity throughout the UK compared to other comparable economies. 

In March 2021 a new super deduction was announced for capital allowances which would allow companies to claim 130% of the cost of qualifying main rate plant and machinery (and 50% of qualifying special rate plant and machinery), as a deduction against taxable profits in the year the investment takes place. This super deduction is available to companies on qualifying capital investment for a 2 year period beginning on 1 April 2021.  The increase in rate of allowance removes the tax incentive to wait to incur capital expenditure until the corporation tax moves from 19% to 25% on 1 April 2023.  However, not all plant or machinery qualifies for the super deduction, but the annual investment allowance for qualifying expenditure of up to £1m annually also lasts until 31 March 2023. 

Once the super deduction has ended, the UK’s capital allowance regime for qualifying plant or machinery will continue to offer: 

1. The Annual investment allowance (“AIA”) which allows businesses to deduct the full value of qualifying plant and machinery investment up to £200,000 from 1 April 2023. 
2. Writing down allowances that write down the value of qualifying plant and machinery investments over several years. The current rates are 18% reducing balance for main rate assets and 6% reducing balance for special rate assets. 
3. Certain asset-specific allowances, such as 100% first-year allowances for zero rated cars. 

There are a range of other capital allowances which include the structures and buildings allowances at 3% straight line allowance on the costs of construction and renovation of non-residential buildings, and 100% for capital expenditure for research and development purposes. 

The government is currently exploring a number of options that would make the tax treatment for capital investment in the UK more competitive with other OECD countries. Consultations will be held over the summer and the decision is expected to be announced at the Autumn budget. Some things currently being considered are: 

1. A permanent increase to the AIA limit; 
2. An increase in the writing down allowance rate for the main and special rate pools; 
3. New first-year allowances that would incentivise capital investment; 
4. Full expensing of qualifying investments in the year of expenditure. 

Research and development (“R&D”) 

The government again mentioned an intention to reform the R&D tax credit system. This was first mentioned in the 2021 Spring statement with the objective of ensuring the UK remains competitive for innovation and cutting-edge research. This reform will expand qualifying expenditure to cover all cloud computing costs associated with R&D and expenditure incurred on pure mathematics (in sectors such as AI, computing and robotics).   

The generosity of the R&D tax relief regime in relation to the benefits to the UK is also under focus.  The benefits of tax relief will be refocussed on qualifying work done primarily in the UK unless there is a regulatory or other material requirement for it to be done outside the UK.  Attention will be given to driving out abuse of the SME R&D relief regime, and also to making the RDEC regime for larger companies more attractive.   

Further announcements are expected at the Autumn budget.