Jeremy Hunt’s Budget 2023: Is It Good or Bad for Business?

On March 16^th, Chancellor Jeremy Hunt unveiled his latest budget, outlining the government’s plan for the economy in the coming year. With the economy still recovering from the COVID-19 pandemic, many businesses were eagerly awaiting news of any policies or measures that would provide support and stimulus. Here, we’ll take a closer look at some of the key points of the budget and what they mean for businesses.

The OBR has improved its projection of the UK’s financial status, predicting a milder economic decline this year, higher growth in the medium term, and an overall enhancement of the public sector’s finances.

Compared to November, the UK’s GDP growth forecast has been upgraded, with an overall contraction of just 0.4% expected in Q1 of 2023. The country is expected to avoid a recession in 2023 and begin recovering earlier than previously anticipated, reaching its pre-pandemic peak by mid-2024. This positive revision is partly attributed to the growth policies announced recently, but mainly due to an unexpected drop in wholesale gas prices. Therefore, businesses should feel more positive about the upcoming year than they did five months ago. Nevertheless, there are still supply-side obstacles.

After peaking at 11.1% in October 2022, inflation is projected to decrease significantly to 2.9% by the end of 2023. The forecast anticipates two years of near-0% inflation in 2025-26, followed by a return to the 2% target in 2028.

Public sector net borrowing is expected to be £152bn (6.1% of GDP) and £132bn (5.1% of GDP) in 2022-23 and 2023-24, respectively. By 2027, the year-on-year decrease is expected to reach a borrowing rate of £49bn – just 1.7% of GDP.

Despite significant fiscal stimulus, the OBR predicts that the overall tax burden will reach a post-war high by 2027-28, including the highest ratio of corporation tax receipts to GDP since the tax’s introduction.

People and Skills

The Chancellor’s recent announcements include several measures aimed at supporting UK businesses and workers.

The government has confirmed in the budget that it will increase funding for current childcare provision and introduce a new policy offering working parents in England 30 hours of free childcare per week for 38 weeks a year, starting from when their child is 9 months old until they begin school. This new policy will be introduced gradually between April 2024 and September 2025. Additionally, the government plans to make support for childcare costs available upfront in Universal Credit and increase the maximum potential benefit for parents, although the timeline for this is unclear. The government’s focus on childcare shows a commitment to supporting parents in the workforce.

The government has also announced an expansion to Skills Bootcamps and the introduction of ‘Returnerships,’ which combine existing skills programs to support out-of-work individuals, primarily those over 50 years old. The plan includes £63 million for an additional 8,000 Skills Bootcamp places in 2024-25 in England and 40,000 new sector-based work academy program placements across 2023-24 and 2024-25 in England and Scotland. Although the new offer may help businesses attract and train experienced workers, it remains uncertain how an expanded skills offer will address underlying causes of inactivity and encourage over-50s to return to employment.

The government has abolished the Lifetime Allowance (LTA), which previously taxed withdrawals at 25% or 55% when taken as a lump sum. The Annual Allowance (AA) has also been raised from £40,000 to £60,000, and the Money Purchase Annual Allowance (MPAA) from £4,000 to £10,000. These measures are greatly welcomed in an attempt to help retain highly skilled older workers in the workforce and alleviate the skill shortages faced by businesses.

Taxation

Under the capital allowance scheme, businesses can offset the cost of specific capital expenses against their taxable profits, resulting in reduced tax payments. However, the end of the current 130% super-deduction for capital allowances coincides with an increase in the main rate of corporation tax to 25% from April 2023.

To promote investment, companies can claim 100% capital allowances on qualifying expenses on new plant and machinery from 1 April 2023 to 31 March 2026. This permits the complete expensing of certain expenditure in the year it is incurred, including equipment, computers, lorries, and select fixtures. A company with profits over £250,000 that spends £100,000 on qualifying items could reduce its corporation tax by £25,000 by making such an investment. It should be noted that this allowance is only available to companies which pay corporation tax.

While the Chancellor aims to make full expensing a permanent policy, it currently only applies to companies for a three-year period. The aim of this initiative is to provide certainty for businesses to plan for increased business investment to drive growth. For investment in assets that are not included in the main expense pool, including long life assets such as electrical works, lighting, heating systems, and solar panel, the 50% first-year allowance (FYA) has been renewed allowing companies to deduct 50% of the cost of these assets from their profits in the year of purchase. This policy continues for companies on new special rate and long-life assets until 31 March 2026.

This measure benefits companies spending over their £1m annual investment allowance (AIA) limit, enabling them to achieve 100% tax relief. Otherwise, such special rate expenses would only qualify for 6% writing down allowances, and tax relief would be obtained over a longer period.

However, there are still exclusions for full expensing and 50% FYA, including leased assets (except if background plant and machinery in a building), non-new expenses, and cars. Nevertheless, leased assets and second-hand expenses remain eligible for the annual investment allowance.

The government has also confirmed the extension of the 100% first-year allowance for qualifying expenditure on electric vehicle charge-point equipment. This extension will be in place until 31 March 2025 for corporation tax and 5 April 2025 for income tax.

Research and Development

From 1 April 2023, a higher rate of relief for loss-making R&D intensive SMEs will be introduced. SME companies whose qualifying R&D expenditure constitutes at least 40% of their total expenditure will be able to obtain an effective credit of 27p for every £1 of qualifying R&D expenditure they make. Two new categories of qualifying R&D expenditure will be created for data licenses and cloud computing services. The previously announced restriction on the inclusion of some overseas expenditure in R&D tax relief claims is deferred for a year until 1 April 2024. Draft legislation on a potential merged R&D relief scheme will be published for technical consultation in the summer.

The UK’s artificial intelligence companies will receive a boost in support through the introduction of an “AI sandbox”, as announced by the Chancellor. This move is crucial for maintaining the UK’s position as a fintech hub and combined with R&D support for small and medium-sized enterprises, tech and pharmaceutical companies investing heavily in innovation, it will ensure future success for businesses in these sectors.

This initiative may help to offset some of the negative effects of the Research and Development Tax Credit scheme as it offers a higher credit rate only to businesses that spend at least 40% of their total budget on qualifying R&D spend, which could be a significant barrier to entry. Additionally, the credit only applies if the company is operating at a loss.

Investment Zones

The Government has announced 12 Investment Zones across the UK, with the aim of driving economic growth and “levelling up” the country. Each English Investment Zone will have access to £80m over five years, including a single five-year tax package matching that in Freeports, enhanced rates of capital allowance, structures and buildings allowance, and relief from stamp duty land tax, business rates, and employer national insurance contributions. Grant funding will also be available to address local productivity barriers.

The Investment Zones are located in the West Midlands, Greater Manchester, the North-east, South Yorkshire, West Yorkshire, East Midlands, Teesside, and Liverpool. The government has invited local partners in eight areas in England to begin discussions on establishing Investment Zones, and it will work with the devolved authorities to support the introduction of Investment Zones in Scotland, Wales, and Northern Ireland on further zones.

These investment Zones will help drive growth regionally, especially those with significant strengths in industries such as clean energy, life sciences, advanced manufacturing, and digital and creative industries. The tax incentives and funding to be used to improve skills, provide specialist business support, improve the planning system or to improve local infrastructure.

In Summary

The announcements made in the Budget were, in the words of Jeremy Hunt, designed to drive growth through the three E’s of Enterprise, Employment, Everywhere. Given the backdrop of the largest corporation tax levels in the post war era, it will be interesting to see how successful this budget will be in delivering growth but so far the general response from business groups such as the CBI has been fairly positive. Encouraging business investment first year allowance scheme, enhanced capital allowances for certain R&D, the boost to regional economic growth through the investment zones and ensure greater transparency in transfer pricing. SMEs with high R&D expenditure will benefit from the increased relief, and the Investment Zones could provide a much-needed boost to the local and national economies.

As always, the devil is in the details, and it remains to be seen how these policies will be implemented and that their real-world impact will be. However, businesses can take heart from the fact that the Government is taking steps to support economic growth and recovery, and that there are opportunities for businesses to benefit from these measures.

Where Now Consulting Ltd is a consultancy and business advisory firm that specializes in facilitating business transformation and growth. By partnering with our clients, we aim to enhance their overall business performance. Our team consists of professionals with diverse skill sets ranging from sales, operations to finance, allowing us to provide a comprehensive approach to support our clients. Whether your business requires a new growth strategy or is going through a crisis of strategy, profitability, or liquidity, Where Now Consulting is committed to being your partner for future success.