Spring Statement: Tax reforms to boost investment in capital and ideas
The Chancellor contemplates reforms to R&D tax incentives and capital allowances in his Tax Plan.
The Chancellor contemplates reforms to R&D tax incentives.
In the Spring Statement, the Chancellor unveiled his ‘Tax Plan’: a three-part plan for tax covering the remainder of this Parliament. This article focuses on the ‘capital’ and ‘ideas’ elements of the Plan which seek to boost businesses’ capital investment and ensure the UK remains a competitive location for cutting edge research. To achieve these goals the Chancellor announced that the Government will consider a number of options for the reform of capital allowances and research and development (R&D) tax incentives, with further announcements to be made at the next Budget. In addition, three initial reforms to R&D tax reliefs were set out in the Spring Statement and are expected to come into effect in April 2023.
The ‘capital’ element of the Chancellor’s Tax Plan seeks to boost capital investment. With the super-deduction set to end in March next year, the Government is considering options to support future business investment from April 2023. With this in mind, the Chancellor set out the following possibilities in the Spring Statement:
- Increasing the permanent level of the Annual Investment Allowance, for example to £500,000;
- Increasing Writing Down Allowances (WDAs) for main and special rate assets from their current levels of 18 percent and 6 percent to 20 percent and 8 percent;
- Introducing a First Year Allowance (FYA) for main and special rate assets where firms can deduct, for example, 40 percent and 13 percent in the first year, with the remaining expenditure written down at standard WDAs;
- Introducing an Additional FYA, to bring the overall amount that can be claimed to greater than 100 percent of the initial cost; and
- Introducing full expensing, to allow businesses to write off the costs of qualifying investment in one go.
The Government will also consider whether changes should be made to other allowances, such as the Structures and Buildings Allowance, or if new reliefs targeting specific investments should be introduced. Businesses will be consulted on their views as part of the Government’s decision-making process.
The ‘ideas’ part of the Chancellor’s Plan seeks to encourage businesses to invest more in R&D and identifies R&D tax reliefs as a key player in making this happen. Three initial reforms were set out by the Chancellor in the Spring Statement for which draft legislation is expected to be issued in the summer and the rules made law with effect from April 2023.
- All cloud computing costs associated with R&D, including storage, will qualify for relief;
- The definition of R&D for tax incentives will be expanded to include pure mathematics (likely to be relevant in IT and modelling data for R&D purposes); and
- The Government will legislate so that expenditure on R&D activities undertaken outside the UK can continue to qualify for tax reliefs where there is a material or regulatory requirement for this work to be carried out overseas.
However, it was noted that while these are “important initial reforms” the Government will also consider “further steps to ensure the UK’s R&D tax reliefs are as effective as possible”. These steps include:
- Increasing the generosity of the R&D Expenditure Credit (RDEC) to boost R&D investment in the UK; and
- Considering what more can be done to tackle the abuse of R&D tax reliefs, particularly in the small or medium-sized enterprise scheme.
The Government plans to continue the review of R&D tax credits and will make further announcements in the autumn.