No spring surprises expected to be sprung
Tomorrow afternoon, Rishi Sunak will deliver his Spring Statement to the nation. The Spring Statement is where the Chancellor provides an update on the Government’s plans for the economy based on the latest forecasts from the Office for Budget Responsibility (OBR) rather than a full Budget.
Given this is an ‘update’ on where the country’s finances are at, I don’t see it as a day to ‘spring’ any surprises on anyone, as they are usually reserved for Budget Day later in the year. So my expectations are low. But predicting the Government’s next steps is always extremely tricky at the best of times, without a global pandemic and potential war to take into account.
So, what do we know and what do we think might happen?
Social & Healthcare Levy
In September last year, Prime Minister Boris Johnson set out plans to reform the NHS and the wider Health and Social Care in the UK by raising £36billion through an increase in National Insurance and Dividend tax rates.
This would come in the form of a 1.25 percentage point increase to Class 1 employee, employer and Class 4 self-employed National Insurance rates, along with the same percentage point increase on dividend tax rates.
With the nation feeling the pinch in other areas, such as fuel prices, there have been calls for the increase to be scrapped, or at least delayed.
Can I see that happening? Unfortunately, no. The reality is that the Government now not only need to repay the debts racked up throughout the Covid pandemic, but they may also have an eye on the defence budget should the scenes in Ukraine begin to escalate even further.
Research & Development Tax Credits
On Thursday 24 February, Rishi delivered a speech at the annual Mais lecture at Bayes Business School in which he discussed his thoughts around Research & Development Tax credits.
R&D tax credits allow a company to enhance certain qualifying expenditure for tax purposes if they have undertaken qualifying R&D to overcome technological or scientific uncertainties.
However, R&D tax credits seem to be high on Rishi’s agenda, especially around them being targeted to the right companies. It seems Rishi has the thought process that Small & Medium sized companies (SMEs) would undertake the same level of R&D regardless of whether tax relief was available, and therefore is questioning, is the scheme fit for purpose?
On Tax Administration and Maintenance Day, held late November last year, the Government released a consultation into R&D tax credits and various areas including:
- Expanding qualifying expenditure to include Data and Cloud costs
- Focusing on innovation in the UK
- Administration requirements which target improvements in compliance
However, at the Mais lecture, Rishi seems to have gone one step further in considering the overall effectiveness of the scheme, rather than looking at individual parts.
Rishi commented that, although we have one of the most generous tax regimes for R&D investment anywhere in the world, it is not working as well as it should, and that UK business spending on R&D amounts is just 4x the value of R&D tax relief, compared to the OECD average of 15x.
Rishi referenced in his speech a report carried out by the University of Cambridge, which indicated that the Large company R&D scheme generates much higher R&D investment compared to the SME R&D scheme. The analysis noted a vast difference in generation of up to £2.70 per £1 for the Large scheme and up to only £1.28 per £1 for the SME scheme.
Could wide-sweeping changes be afoot for R&D tax relief? It certainly seems like an area capable of ‘springing’ a surprise next week.
Corporation Tax Rates / Super Deduction
At last year’s Spring Statement, Rishi announced that Corporation Tax rates will rise from 1 April 2023 for companies with taxable profits above £50,000. For those with profits above £250,000 the rate will rise from the current 19%, up to 25% – clearly a big jump!
The flip side to the tax rate increase was the introduction of the Super Deduction, which broadly allows a 130% tax deduction for new plant and machinery acquired before 31 March.
Effectively, the Super Deduction brought forward the tax relief a company will achieve post 1 April 2023 if they pay at the highest 25%. This is because 130% tax relief at a corporation tax rate of 19% gives effective tax relief of 24.7%.
Two things to note here:
1. The advance of tax relief noted above assumes that the Government will continue with some form of Annual Investment Allowance (AIA). AIA currently allows a company to write off up to £1m of qualifying expenditure but is expected to drop to £200,000 come 1 April 2023. Could Rishi announce any enhancements to this relief? Potentially.
2. Given the squeeze in other areas such as the National Insurance increases noted above, fuel and gas prices, plus increases to the National/Living Minimum Wages, could Rishi reconsider the rise to the 25% Corporation Tax rate? Again, potentially, but Rishi might want to keep this one up his sleeve to deliver as an early Christmas present come the Autumn Statement later this year.
If Rishi does happen to announce any reduction in the planned rise, it would make the Super Deduction much more attractive as it would realise higher tax relief than relief which could be obtained post 1 April 2023.