Business taxes in the Spring Statement and what they might mean for you

The Chancellors Spring Statement (only one month ago but it seems like longer) is now mostly remembered as almost instantly imploding, followed by some awkward questions about the UK tax regime for non-UK domiciled individuals. The part of the Spring Statement Tax Plan that perhaps did not get the discussion it deserved was that related to boosting growth and productivity in the private sector. The UK has long had poor productivity compared to its G7 peers and peer economies in NW Europe. The second part of the Tax Plan acknowledged this and set out an intention to align the incentives of the corporate tax code towards investment in capital equipment, people and innovation.

If this seems an overly obvious thing to propose it does mark a departure from what has hitherto been the underlying philosophy of corporate tax in the UK: that you just need to have low headline corporate tax rates and the economy will flourish.  The proposal seems to be moving away from this to a more European system of higher headline rates but privileging productive investment which will create lower effective tax rates for companies investing in productive capacity and higher effective tax rates for those which do not. In other words, the UK tax system will try to create a degree of competitive advantage for businesses that innovate and invest in productive capacity. 

Boosting capital investment

The Chancellor announced that he would consult on a range of options to replace the current super-deduction which offers up to 130 percent relief on capital investment up to 31 March 2023.  Since the headline tax rate at that point moves from 19% to 25% the super-deduction was necessary to avoid there being a tax incentive to defer investment until the higher rate of tax kicked in: 130% relieved at 19% gives you the same result as 100% relieved at 25%. 

Different ideas will be consulted for the new regime from 1 April 2023 with the stated aim of making the tax treatment for capital investment in the UK more competitive with other OECD countries. The most generous suggestion seems to be the full expensing of investments in the year of expenditure.

Innovation and R&D tax credits

The Spring Statement announced some changes to the R&D tax regime but it is expected that further announcements will be made in the Autumn Budget which look like making the scheme for larger companies more generous whilst perhaps restricting the generosity of the scheme for SME’s. This is based on recent assessments of the effectiveness of both schemes, including from the University of Cambridge (‘Is the UK’s flagship industrial policy a costly failure?’ Pub May 2021), which estimate that spending by British businesses on R&D was four times the value of the tax relief compared to OECD average of fifteen times and had a stronger incentive effect on larger companies.

Investing in our people

The Tax Plan also made the comment that ‘UK companies spend less than half the European average on training their employees' and that ‘the government is increasing skills funding significantly over the Parliament. We want businesses to do the same’. This might sound more compelling were it not for the fact that student debt (which operates something like a tax on skills development at an individual level) will attract interest rates of up to 12% from September 2022. 

Will it work and what do you do right now? 

Pulling tax levers is often less effective than governments hope and pulling the wrong ones even less so.  The same University of Cambridge study which questioned the effectiveness of the R&D reliefs attributed UK underperformance to the limited size of the UK market and the early sale of entrepreneurial start-ups. If you intend to sell in the short term, investing in the long-term skills base of your people is not likely to be especially attractive even if the tax breaks are tweaked at the margin.  Rather the economic incentive is to maximise short-term profit to get the highest value on sale. 

Even if the proposals don’t address ‘short termism’ (and it would be great to see some serious thought on how the tax system might be tilted in favour of the long term) it does make sense to align the tax system with a rational set of economic incentives.  If carried through, this might be a step in the right direction, especially for the family company sector which is committed to long-term ownership. 

But what do you do right now when we don’t know what the rules are going to be? Do you wait to see what emerges in the Autumn Statement or press ahead with any investment plans you might currently have?  The emerging themes seem to be probably more or less maintaining the value of reliefs for capital expenditure with perhaps, for R&D, improvements for the large company scheme but reductions for the SME scheme. A quick conversation with your normal tax contact to explain what your plans involve will allow them to advise you on your specific projects.

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If you have any questions regarding the above, please get in touch with us using the form or contact Lindsay Pentelow below. 

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