12 April 2022
Introduction
The UK government announced the Spring Statement on 23 March 2022 in the UK, making changes to the tax regime. Please see the key changes that may affect you and your business.
Direct business taxes
Income tax reduce:
The government announced it will cut the basic rate of income tax from 20% to 19% from April 2024, before the end of this parliament.
This reduced rate will apply to the basic rate of non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland. The reduced rate will apply to taxable savings income, irrespective of where the individual lives and to the default basic rate which applies to trustees and non-resident individuals. The change will be included in a future Finance Bill.
The reduction in the basic income tax rate for non-savings, non-dividend income will not apply to Scottish taxpayers because the power to set those rates is devolved to the Scottish government.
A 3-year transition period for gift aid relief will apply, to maintain the income tax basic rate relief at 20% until April 2027.
Research & Development (R&D) tax relief
R&D tax reliefs will be reformed to support modern research methods by expanding qualifying expenditure to include data and cloud costs. The government confirmed the proposals from Autumn Budget 2021. At the Spring Statement the government:
• announced that, in order to support the growing volume of R&D underpinned by mathematical advances, the definition of R&D for tax reliefs will be expanded to clarify that pure mathematics is a qualifying cost;
• confirmed that relief will be extended to all cloud computing costs associated with R&D, including storage;
• restated its commitment to refocusing the relief towards innovation in the UK, rather than overseas. However, recognising that there are some cases where it is necessary for R&D activities to take place overseas, the government announced that it will legislate so that expenditure on overseas R&D activities can still qualify for relief where the conditions required for the research are not present in the UK, or where regulatory or legal requirements mean that the activities must take place overseas.
The required legislation will be published in draft this summer before being included in Finance Bill 2023 for these measures to come into effect in April 2023.
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Capital allowance:
One of the planks of the tax plan is to increase capital investment by businesses. In response to the coronavirus pandemic, the government brought in a 130% super-deduction (50% for ‘special rate’ assets) having effect from 1 April 2021 until 31 March 2023. This has been an expensive measure and there is no suggestion in the Spring Statement that it will be extended beyond this date.
At this stage the government is not setting out specific proposals but has provided ‘illustrations’ of the types of changes it could make:
• Increase the permanent level of the annual investment allowance (AIA), for example to £500,000: the AIA is currently £1m and is due to revert to £200,000 from 1 April 2023, the same date on which the 130% super-deduction comes to an end.
• Increase writing down allowances for main and special rate assets from their current levels of 18% and 6% to 20% and 8% respectively: in other words, returning to the rates that applied before April 2012.
• Introduce a first year allowance (FYA) for main and special rate assets where firms can deduct, for example, 40% and 13% in the first year, with the remaining expenditure written down at standard rates: 100% plant and machinery FYAs are currently available (where the AIA or super-deduction are not available or not claimed) only for certain green technologies
• Introduce an additional FYA, to bring the overall amount that can be claimed to greater than 100% of the initial cost: for instance, an additional 20% allowance to be claimed in the first year on top of standard writing down allowances.
• Introduce full expensing, allowing businesses to write off the costs of qualifying investment in one go.
• Make changes to the structures and buildings allowance or to enhanced capital allowances in freeport sites.
It is intended that ‘key changes’ will come into effect from April 2023. This is an early stage it is possible that some more fundamental changes could emerge from this review.
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Enterprise management incentive (EMI) and Company share option plan (CSOP) reform
At Budget 2020, the government launched a review of the enterprise management incentive (EMI) scheme. The government confirmed at the Spring Statement that the review has concluded that the current EMI scheme remains effective and appropriately targeted. However, the Spring Statement also noted that the scope of the review will now be expanded to consider if the other discretionary tax-advantaged share scheme, the company share option plan (CSOP), should be reformed to support companies as they grow beyond the scope of EMI.
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Indirect business taxes
VAT reduced rate on the supply of energy saving materials
Since 2019, the supply of ESMs has been subject to the reduced rate of VAT of 5%, provided that one of two sets of conditions are met; the ‘social policy conditions’ or ‘the 60% test’ (these restrictions were imposed on the UK by the EU and are contained within VATA 1994 Sch 7A Group 2).
The social policy conditions require that the supplies are made to persons aged 60 or over or in receipt of certain benefits, to housing associations or installations in accommodation used solely for a relevant residential purpose.
The 60% test requires that the cost of the ESM does not exceed 60% of the total value of the supply. If the cost of the ESM exceeds 60% only the labour cost element qualifies for the reduced rate (with the materials standard rated).
From 1 April 2022, for ESMs which are installed in England, Wales and Scotland, the reduced rate of VAT will become more widely available, and the saving will be greater due to the following changes:
• the relief will no longer be restricted by the social policy conditions or the 60% test;
• wind and water turbines, which were removed from the list of ESMs by the EU in 2019, will be added back;
• a temporary zero rate will be introduced with effect from 1 April 2022 until 31 March 2027; and
• unless the government introduces further legislation to extend the period of the zero rate, the installation of ESMs will revert back to the 5% reduced rate of VAT from 1 April 2027.
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Employment allowance and NIC
Employment allowance increase
The Spring Statement announced an increase to the employment allowance from April 2022, meaning eligible employers will be able to reduce their employer NICs bills by up to £5,000 a year. This follows the April 2020 increase from £3,000 to £4,000. The government estimates this increase will benefit around 495,000 businesses, including around 50,000 businesses which will be taken out of paying NICs.
NIC increasing thresholds. Reducing class 2 NICs payments for low earners
For the employed, the Spring Statement announced an increase in the annual NICs primary threshold from the planned £9,880 to £12,570, aligning it with the income tax personal allowance, from July 2022.
For the self-employed, the Spring Statement announced an equivalent increase in the annual NICs Lower Profits Limit to £12,750, again to ensure alignment with the income tax personal allowance, from April 2022. In addition, from April 2022, the self-employed with profits between the small profits threshold and lower profits limit will not pay any class 2 NICs, but will continue to build up national insurance credits.
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Summary
Thus, although some issues are only now under discussion, it should not be forgotten that certain important changes have already been made or will be made in the near future. We will continue to monitor legislation changes and keep you updated in order that you can take appropriate action in a timely manner.