Budget 2023

Until the Chancellor sat down, for many businesses, the Annual Investment Allowance (AIA) meant that all their capital expenditure on plant and machinery could be written off against tax in the current year (if they had sufficient taxable profits). As the AIA regime was limited to £1 million, larger businesses had to obtain their relief over time via the capital allowances rules. For the three years commencing 1 April 2023 to 31 March 2026, companies can now claim 100% relief on most plant and machinery i.e. "full expensing". For so called "special rate expenditure", on items such as integral features and thermal insulation, a special rate of first year allowance of 50% will instead be available in the year in which the expenditure is incurred.

Unsurprisingly, if there are disposals of items which have benefitted from full expensing or the 50% full year allowance, there will be a clawback of 100% or 50% (as appropriate) tax relief, via balancing charges. As the temporary rules form part of the capital allowances regime, the usual restrictions (e.g. the exclusion of cars and the requirement that plant be unused) and anti-avoidance rules may apply. Furthermore, we suspect this is aimed at attempts to defer already committed expenditure in order to be treated as incurred in the three-year period. There will be measures to "counteract arrangements which are contrived, abnormal or lacking a genuine commercial purpose". Businesses operating through partnerships rather than companies will not benefit from these measures.

Author: Gary Richards

Companies will appreciate the fact that the costs of datasets and of cloud computing will be included in expenditure potentially qualifying for one of the UK's two R&D schemes, and that there will be a consequential change to the "patent box" regime.

In addition, "R&D intensive" SMEs will be able to claim an enhanced rate of tax relief (in effect that currently applying, compared with that applying to most SMEs from 1 April 2023, after the Government's previously announced reduction in the level of SME R&D support). To be "R&D intensive" very broadly at least 40% of a company's total expenditure needs to be on qualifying R&D spend.

In addition, growing businesses moving from the SME scheme to the R&D Expenditure Credit scheme will both benefit (as now) from being treated as within the SME scheme for a further year. In addition, any other companies in the same group will be similarly treated (whereas currently those fellow group companies lose their SME status immediately).

Otherwise, many of the changes previously consulted on by the Government (prompted by concerns over unjustified claims) are to be implemented. This includes the requirement to submit claims digitally, descriptions of the R&D and advance digital notification for infrequent or new claimants of an intention to claim.

Author: Gary Richards

HMRC has (for almost three years) been reviewing the existing enterprise management incentive (EMI) landscape which enables certain companies to grant share options to its employees with significant tax benefits. Following a call for evidence, a number of recommendations had been made to HMRC on how EMI plans could be made more attractive to increase the recruitment and retention of key employees. HMRC has today announced changes that somewhat disappointingly only ease certain administrative aspects but do not address more fundamental concerns, such as broadening the eligibility criteria.

From 6 April 2023:

• There will no longer be a requirement for a company to set out details of any restrictions that apply to the option shares to be acquired under the option; and
• The requirement for a company to declare that an employee has signed a working time declaration when granted an EMI option has been removed (employees must still meet the working time requirement).

These changes also apply to EMI options granted before 6 April 2023 but not yet exercised.

From 6 April 2024 there will be a further change, extending the deadline for a company to notify HMRC of the grant of an EMI option from the current 92 days following grant, to the 6 July following the end of the tax year in which the option was granted.

Together, these changes are helpful as they will go some way to ensure companies do not inadvertently fail to meet what are essentially administrative requirements, which are often not discovered until the sale of the company.

Authors: Stephen Diosi, Sakhee Ganatra and Sophie Kilminster

As we have previously reported from 6 April 2023 there will be:

• A relaxation of the rules which restrict use of CSOPs when the company has more than one class of ordinary shares, to better align it with EMI; and
• A doubling the employee option limit from £30,000 to £60,000.

These measures will help larger companies that no longer qualify for the enterprise management incentive scheme to offer more attractive share-based remuneration, helping them to recruit and retain key talent.

Authors: Stephen Diosi, Sakhee Ganatra and Sophie Kilminster

SIPs and SAYE are all-employee share plans that provide certain tax benefits to employees. SIPs enable employees to buy shares in their employing companies from pre-tax salary whilst also receiving free shares from the company. SAYE gives employees the opportunity buy shares at a discount at the end of a savings period in which they saved a fixed amount each month.

Having been around for a relatively long time, HMRC today announced that it will be launching a call for evidence to gather information on how they can be improved and simplified.

This is a welcome announcement after many years of calls for HMRC to review the SIP and SAYE legislation. The limits that are available under these plans have not kept pace with inflation. Given the current cost of living crises, this is an opportunity for HMRC to re-base these programmes to enable lower paid employees to invest for the future and align themselves more loosely with the future growth of their employing company. We will update you when we know more.

Authors: Stephen Diosi, Sakhee Ganatra and Sophie Kilminster

Generally, contributions to a pension scheme are free of income tax. This means that in economic terms, the pension pot receives the full gross amount of a contribution without income tax deducted. There are, however, two limitations on this generous treatment: the annual allowance and the lifetime allowance. The annual allowance restricts the amount that can be contributed, or the amount that a defined benefit scheme can grow, per year.

Until today's budget the annual allowance had been set at £40,000. It will now increase to £60,000. The lifetime allowance is the total amount that can be contributed to a defined contribution scheme over an individual's lifetime, or the total value of benefits that can accrue in a defined contribution scheme, without complicated tax consequences.

The lifetime allowance has until now been set at £1.07 million. The Government has announced that the lifetime allowance will be completely removed, meaning there will be no limit on the amount that an individual can contribute to a pension over their lifetime without tax consequences. Importantly, however, the maximum lump sum that can be taken tax free is being frozen at £268,275. Any amount over this will be subject to tax, which slightly dampens the good news.

Author: Christopher Eames

Changes to the definition of a qualifying charity for UK tax purposes will mean that only UK charities (and their donors) will benefit from charitable tax reliefs. There will be an equivalent restriction for Community Amateur Sports Clubs (CASCs), as tax relief will only apply where CASCs are based in the UK and provide facilities for eligible sports in the UK.

The changes are effective from 15 March 2023 but transitional arrangements will apply so that non-UK charities and CASCs that already benefit from UK charity tax reliefs will continue to be eligible until April 2024.

The taxes affected include:

• Income tax (including Gift Aid and payroll giving);
• Capital Gains Tax;
• Corporation Tax;
• Inheritance tax;
• Stamp Duty;
• Stamp Duty Land Tax;
• Stamp Duty Reserve Tax;
• Annual Tax on Enveloped Dwellings; and
• Diverted Profits Tax.

This will impact certain taxpayers with a UK connection, such as individuals, trustees or companies engaging in direct giving to non-UK charities or CASCs or individuals planning to bequeath non-UK charities or CASCs in their wills.

Clients may wish to review their gifting plans and their wills to ensure that charitable reliefs still apply as anticipated.

Author: Moustapha Hammoud

Agricultural property relief is a valuable relief from inheritance tax (IHT). Where it applies, an individual can pass on land free from IHT on their death or during their lifetime into a trust (subject to clawback provisions). This relief applies to land or pasture that is used to grow crops or rear animals intensively. It also applies to land used for certain other farming activities. To claim agricultural property relief the individual must either meet the seven-year ownership test or the two-year occupation test.

Woodlands relief operates to defer IHT on death and is a fallback where neither business property relief nor agricultural property relief is available. Where woodlands relief applies, IHT on the trees, but not the land, is deferred until the timber is sold.

Until now agricultural property and woodlands reliefs applied to land and property located in the UK, the Channel Islands, the Isle of Man, or the European Economic Area. However, from 6 April 2024 the reliefs will only apply to property located in the United Kingdom.

Author: Christopher Eames

The Government has also announced a consultation and call for evidence on "taxation of environmental land management and ecosystem service markets". There are currently three environmental land management schemes in England. These are schemes whereby the Government pays landowners and farmers to provide environmental goods and services such as improving water quality or creating new woodlands. They will replace subsidies for land ownership now that the UK has left the EU. An ecosystem service market is essentially a marketplace where landowners or farmers can "sell" services such as removing carbon from the atmosphere to the private sector. In exchange they receive a credit or unit. These marketplaces are in their infancy in England.

There are two parts to the consultation. Part 1 is a call for evidence on the tax treatment of the production and sale of ecosystem service units. Part 2 is a consultation on the scope of agricultural property relief and whether it should be expanded to encourage more eco-friendly behaviour.

For those clients with undeveloped land this consultation may lead to interesting opportunities.

Author: Christopher Eames

As previously reported the Government's changes to the rules applying to transfers between spouses and civil partners who are in the process of separating will take effect from 6 April 2023.

Individuals in this situation will have three years in which to make a "no gain, no loss" transfer of assets between themselves when they cease to live together. This is an important reminder for couples who are separated as it gives them more time to address the complexities arising from decisions to transfer assets between themselves.

Author: Carol Katz

The Government announced it will be doubling the maximum sentence for tax fraud from seven to 14 years. It will also consult both on the introduction of a new criminal offence aimed at promoters of tax avoidance who fail to comply with a legal notice from HMRC to stop, and the expedition of the disqualification of company directors involved in promoting tax avoidance.

As well as these measures, the Government will invest £47.2 million additional funds to improve HMRC's tax collecting capabilities. These measures are likely targeted at addressing the tax gap, thought to be in the region of £32 billion.

Author: Isabelle Copeland