On Wednesday, 22 November, Chancellor Jeremy Hunt delivered his Autumn Statement – an event closely watched not just by economists, politicians and businesses, but, as this was in a sense a much bigger Autumn Statement than most, the entire electorate.
All eyes were on Hunt to deliver a plan that puts Britain back on a path towards a lower tax economy. But the government had to tread carefully for, were it to introduce significant reductions now, they could cause inflation to spiral and exacerbate a crisis in already strained public services. At a time when Britain’s debt is nearing 100% of national income, a pre-election spending spree powered by borrowing was also clearly not in the cards.
Bank of England forecasts flatline growth for next year and cautions a recession is still very much a real possibility. Hunt, therefore, headed into Wednesday a prisoner of economic circumstances in what the Financial Times aptly dubbed ‘stagnation nation’, with no choice but to elicit optimism and prospects for growth. Did he deliver?
Higher inflation has helped give the Chancellor additional room to manoeuvre – credit to the so called ‘fiscal drag’ created by the freeze on thresholds and allowances (£60 billion of it!). With that headroom, at the centre of Hunt’s Autumn Statement were £20 billion of tax cuts and a number of tax regime simplification measures, including a permanent 100% capital allowance for qualifying business investment (the so called ‘full expensing’ regime), extension of freeport and investment zones, and a single merged scheme for research and development (R&D) tax relief.
‘Full Expensing’ Regime for Capital Allowances Made Permanent
‘Full expensing’ is a first-year allowance (FYA) available to companies investing in new qualifying plant and machinery which previously applied from 1 April 2023 to 31 March 2026. The relief offers 100% FYA for main pool assets and 50% FYA for special rate assets. The Autumn Statement confirmed the relief was to be made permanent and would no longer phase out on 31 March 2026 as originally announced. HM Treasury estimates that the impact of making full expensing permanent will help to boost investment by £20 billion per annum.
Why is this important:
- Simplification and certainty – The permanent nature of the relief provides certainty for business looking to commit to significant capital investment. A pitfall of the capital allowances regime historically has been the ever-changing landscape which in turn increases risk levels when forecasting long-term projects. The new certainty of the incentive allows long lead capital projects which often come with big ticket spending some degree of comfort over tax position and fiscal planning.
- Cash flow benefit – The relief provides a significant cashflow benefit for large entities in a profitable/tax paying position as an incentive for investment in new plant and machinery. Working on the assumption that the £1m annual investment allowance (AIA) has already been utilised across the business/group, which will be the case in most large groups, and £1m qualifying investment in new machinery would equate to a £250k (£1m x 25% CT rate) cash tax saving using the Chancellor’s example (assuming a business has sufficient taxable profits in the period to enable this benefit to be realised immediately).
- Extended window (10 years) for ‘freeports’ & ‘investment zones’ offer not just enhanced CA investments incentives but wider tax benefits too:
Freeport and investments zones provide a number of tax advantages to business investing and operating in the qualifying areas. The Autumn Statement saw not only the current window of 5 years extended to 10, but the introduction of additional ‘freeport’ and ‘investment zones’, namely in Wales and Scotland. These sites provide a number of enhanced benefits such as:
- 100% enhanced deduction for plant and machinery
- 20%/10% enhanced deduction for Structures and Buildings
The significant extension and certainty to this regime provides businesses with the certainty and flexibility to confidently make long-term investment decisions.
R&D Tax Relief
Innovation has long been touted as one of the main engines behind the British economy, and harnessing that power are none other than Britain’s entrepreneurs. If the UK is to continue its bid against the Continent as a leader in early-stage investment, R&D support must remain a critical – and fit for purpose – vehicle. The environment for UK SMEs, however, has been quite bluntly rather brutal in recent years, from the languishing effects of COVID to piece-mealed legislative measures poorly executed and enforced in the space of innovation funding.
The government held a series of technical consultations and, along with ongoing compliance measures, appeared resolved to overhaul a mechanism it no longer saw as effective in delivering the support to innovative British businesses and, ultimately, growing the economy. It all culminated with the following measures confirmed in the Chancellor’s Autumn Statement:
- Merged scheme – the proposal initially announced at Budget 2023 got the green light and will be legislated in the Finance Bill later this year. All changes will come into effect for accounting periods starting on or after 1 April 2024. This is a deferral on the original proposal in the draft legislation published in July which would have applied the changes to expenditure incurred on or after 1 April 2024. The government has clearly recognised following the latest technical consultation that substantially more time will be needed to effect the changes and to allow business to get up to speed with them/eliminate the complexity of claiming under different schemes for accounting periods straddling 1 April 2024. That said, the newly-confirmed timeline remains highly ambitious.
- Contracted out R&D – the merged scheme will see moving the claim to the company making the decision to do the R&D and, therefore, bearing the risk. The government postulates that this would attract more R&D relief by allowing the decision maker to claim the R&D (i.e. where a company contracts out qualifying activities to a contract research organisation, such as a clinical trial, the company will be able to claim for the costs of that contract. Under the current regime, there are companies conducting subcontracted work as part of another company’s R&D project whose work is ‘routine’ (not R&D) in isolation so that neither company can receive R&D relief).
- There will continue to be grey areas where if a company is contracted to provide a product or service which is not R&D, such as constructing a building or a software product, if they undertake R&D in delivering that product or service, they would be able to claim relief even though they are undertaking R&D on an activity contracted to them. The exact details of who should claim the relief will depend on the specific contract.
- Subsidised expenditure – the contracted-out R&D rules above mean that rules relating to subsidised expenditure in the existing SME scheme will be no longer relevant, so these sections will be removed from the legislation for the merged scheme.
- Simplification – a centerpiece of the new legislation was to be the move towards significant simplification of the R&D tax regime, including having a single set of rules for large companies and SMEs to apply. Certain aspects – like the ‘above-the-line’ mechanics of the merged scheme and the single set of rules, particularly around subcontracted R&D, are a welcomed move in that direction. However, the SME intensive scheme for loss-making SMEs (announced at the Spring Budget) will continue to run alongside the new and simplified merged scheme from 1 April 2024. Whilst this is good news for R&D intensive SMEs as the rate of relief remains far more generous, it does little for simplification. There will – still – be 2 schemes … More on that below.
- SME Intensive Scheme – the Autumn Statement lowered the threshold for a company to be considered a R&D Intensive SME from 40% of qualifying R&D spend over total expenditure to 30%. During the technical consultation stakeholders raised vehement concerns about items of exceptional spending which might skew a SME’s intensity ratio for a year and lead to businesses moving into and out of the intensive SME regime creating uncertainty. To address this, Finance Bill 2023 will be introducing provisions to enable an intensive SME which has made a valid claim under the intensive regime in one year to claim the intensive relief in year two. We should also expect to see rules that prevent companies from manipulating their R&D intensive status by shortening their accounting periods.
The saga around the R&D tax relief regime has been unfolding for some time now and the measures announced in the Autumn Statement draw to a close an extensive period of piece-meal legislative measures. Taxpayers and advisors alike should breathe a sigh of relief as, if this achieves nothing more, it does at least indicate certainty and stability in the regime are imminent. This should not, however, discontinue the dialogue with stakeholders with the ultimate goal of providing a compliant and effective mechanism for companies, which is not disconnected from the commercial realities of doing business in the UK today nor in touch with the penultimate spirit of the R&D tax relief regime of bolstering growth through innovation. As for whether the rules achieve the intended goal of a simplified system, the verdict is still out …
Energy
As expected, the Chancellor’s Statement included provisions not only around energy tariffs but perhaps most encouraging was the announcement of additional funds of £300 million per annum in tax relief from 2025 for meeting energy efficient targets. Here are the highlights:
- Freeze on main and reduced rates of Climate Change Levy in the UK in 2025-26 – the levy for electricity and gas will be frozen at £0.00775/kWh, liquid petroleum gas (LPG) at £0.02175/kWh and any other taxable commodity at £0.06064/kWh. Reduced rates will be frozen at 92% for electricity, 77% for LPG and 89% for gas and any other taxable commodity.
- A 6-year Climate Change Agreement scheme, set to start in 2025, providing around £300 million per annum in tax relief in exchange for meeting energy efficiency targets.
- Funding for the 3rd phase of IETF grants is in place with an announcement of further allocations expected in due course.
According to Oxford Economics, UK business investment has grown less than 5% since the start of 2016 when it began stagnating — in part reflecting high uncertainty following the Brexit referendum. By contrast, there has been a 32% growth in US business investment since the start of 2016, and 15% in the Eurozone. Higher interest rates are making business investment decisions even further claustrophobic with fewer business year on year reporting they plan to invest in plant and machinery, or buildings.
It is painfully evident that economic growth needs a jolt – the measures announced by the Chancellor will certainly be put to the test, especially as the Office for Budget Responsibility (OBR), the independent fiscal watchdog, issued yet another gloomy forecast for the UK economy, even as Hunt touted “a country that has turned the corner” in his Statement. Only time will show the true merit of the policy decisions announced, provided these are not reversed in subsequent fiscal rulemaking events in a few months. Businesses need clarity to be able to play their part in resuscitating the economy.
Written by:
- Elena Karadzhova – Head Of Consulting
- Zachary Crossland – Head Of Energy
- Bradley Maughan – Capital Allowances Senior Manager
Upcoming webinars
- Revolutionising R&D Tax Relief: A Crucial Update for Your Business
In this webinar, we dissected the Chancellor’s Autumn Statement, unveiling a merged scheme set to revolutionise the R&D tax regime. We delved into the details, including the timeline, contracted-out R&D, subsidised expenditure, and the pursuit of simplification. We talked about how the adjustments to the SME Intensive Scheme directly support innovative businesses, offering a clearer path to relief.
Watch replay - Energy Efficiency for Your Bottom Line: Tax Relief Measures That Matter
Watch the replay to access the insightful discussions on: What makes up an electricity bill? What am I paying? Climate Change Levy, EII Exemption, UK ETS, and future saving opportunities for 2025 and beyond.
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