As the Chancellor prepares for the Budget, he has had no shortage of suggestions. This includes persistent lobbying for tax cuts from sections of the media and many of Mr Hunt’s Parliamentary colleagues. From the other direction, we’re seeing calls for a relaxation in public spending curbs to help clear hospital backlogs, fund higher increases in public sector pay and sustain energy bill subsidies at their current levels.
However, as our Senior Economist Barret Kupelian argues in his article, a combination of high borrowing costs and a still fragile economic outlook make it almost certain that the tight fiscal environment will be maintained. Referring to both personal and business taxes, the Chancellor said in January that “it is unlikely that we would have the room for any significant tax cuts”. It would also be surprising if he raises currently frozen tax thresholds as he continues to use ‘fiscal drag’ to bump up revenues and help balance books.
In his January speech, the Chancellor set out his vision for long term prosperity and that it will be based around the four ‘E’s of Enterprise, Education, Employment and Everywhere. We can expect more detail in the Budget on these four areas.
Bridging the competitiveness gap
Businesses will welcome a degree of certainty and stability after the changes of last year. Yet in the face of April’s corporation tax rise and additional levies, many are worried about the international competitiveness of the UK tax system. Comparisons with the tax position in the US and EU underline their concerns. To give one sector-specific example, PwC has projected that a London-based investment bank could face a potential total tax rate of 45.7% in 2024 compared to 38.5% in Frankfurt and 27.4% in New York.
Businesses will therefore hope that the Chancellor will provide a clear roadmap for how to meet the Government’s ambition for the UK to have the most competitive tax regime of any major economy. To drive growth, this includes a step-up in support for capital investment now that the end of the 130% super-deduction puts further pressure on UK capital expenditure.
Under the “Everywhere” pillar, we are expecting an announcement about investment zones which will be focussed in high potential but underperforming areas. It will be interesting to see how these compare to freeports which are still in their infancy. However it is clear that both are aimed at delivering on the levelling up promise.
Testing the Government’s green credentials
January saw the launch of Mission Zero, an independent Government-commissioned review on its approach to the transition to net zero. Recognising the vital importance of green transition for job creation, economic growth and international competitiveness in the years ahead, the report focuses on how to ensure that Government policies on net zero are sufficiently pro-business and pro-growth.
The Inflation Reduction Act in the US and the REPowerEU deal have set the bar for Government support for green and secure energy, leaving the UK at risk of falling behind. The Budget is an opportunity to step-up support for businesses as they embark on their green transition. Recommendations set out in the Mission Zero report include reviewing the tax incentives for investment in decarbonisation. It also calls for the launch of a Help to Grow Green campaign offering information and advice to small businesses so they can plan ahead.
Continued changes to R&D relief
Another key area of competitiveness and growth is research and development (R&D). The Chancellor recognises the crucial importance of the innovation industries that “will shape and define this century”. The Government has therefore set a target to raise investment in R&D to 2.4% of UK GDP by 2027. But this would appear to be at odds with the halving of the rate of SME R&D relief from April.
Large companies have welcomed the increase in the R&D tax credit limit from 13% to 20% in the Autumn Statement but part of this benefit is eroded as the corporation tax rises to 25% next month and the level of relief still lags behind the OECD average. Consultations on merging R&D incentives for large companies and SMEs are ongoing. But there are a number of hurdles to overcome in how the structure of a merged relief might work.
Alongside possible adjustments in tax policy, the Chancellor may therefore offer a range of grants and support for emerging industries. We may also see further measures to combat abuse of the R&D regime.
Bolstering enterprise incentives
With stability the watchword, we’re unlikely to see any reversal in the drop in capital gains tax thresholds. But there may be some targeted relief.
Smaller businesses will be hoping that these measures include steps to help them close the capital gap with larger companies and boost access to funding. The Chancellor may choose to look at enterprise incentives in areas such as Seed Enterprise Investment Schemes, the Enterprise Investment Scheme and Venture Capital Trusts, employee incentives or even enhancing the targeted small companies’ rate of corporation tax.
Smaller companies will also be hoping for an easing of the tax compliance burden. This includes improving their ability to consult with HMRC, which may help reduce the costs of administering and navigating complex tax rules.
Strengthening upskilling and reskilling for older workers
Over two-thirds of the people aged 50-54 taking part in the ONS Over-50s Lifestyle Survey reported concerns that a lack of skills had affected their ability to return to work following the pandemic. The Chancellor may therefore look at how to incorporate measures to boost upskilling and reskilling within this age group in the planned reforms to the Apprenticeship Levy.
The Apprenticeship Levy aims to encourage companies with a payroll of over £3 million to spend 0.5% of their wage bill on providing 40 days of high-quality skills training outside the organisation. Concerns have centred on how much this external training takes people away from the workplace, which discourages take-up.
To reduce time-away and loss of production, many businesses have therefore welcomed the cut in a day’s training to six hours, down from seven. The Chancellor could go further through steps such as ring-fencing 25% of the Levy to be spent on 25 days of training.
Join us for The 2023 Spring Budget
Visit our dedicated Budget page on 15 March 2023 to view instant response to the announcements from our team. Register to attend our webcast at 9am on 16 March for a full debrief with our specialist panel who will discuss what the announcements mean for individuals, employers and businesses.
Contact us
