Budget Verdict: Some positives, but corporation tax hike will weaken UK's competitive edge, says Adrian Young
Chancellor Jeremy Hunt’s first Budget contained a number of positives for businesses but pressing ahead with the hike in corporation tax will see the UK lose some of its competitive edge, says HURST tax partner Adrian Young.
Mr Hunt confirmed the rate of corporation tax would rise from 19 to 25 per cent from April 1.
Adrian said the tapered rate for taxable annual profits of £50,000-£250,000 would provide some relief for SMEs, but the increase would be an additional burden on companies which could impact on job and wealth creation.
He said: “We are used to quite low levels of corporation tax compared with other territories. A 25 per cent rate will still give us the lowest in the G7, parallel with the Netherlands, but we will lose some of our competitive advantage for investment over near Europe, such as France and Germany.
“The measure will raise £18bn for the Treasury, and it’s easier politically for the government to say ‘we are targeting big business’, but you don’t have to be a big business to make £250,000 in profit.”
Adrian delivered his verdict at a HURST Budget Review breakfast event held at our Stockport offices.
He welcomed the trial scheme offering tax relief on all qualifying capital expenditure on plant and machinery. The trial will run for three years and replaces the super-deduction scheme.
It should mean a £9bn giveaway, but that is only half of the amount the Treasury will receive as a result of the corporation tax increase, Adrian added.
While also welcoming changes to the pension rules, he noted these would only affect a limited demographic.
Adrian outlined the chancellor’s priorities, which are:
- To halve inflation (this is on track to fall to 2.9 per cent by December);
- Reduce the national debt burden;
- Grow the economy.
Mr Hunt’s ‘Budget for Growth’ was built on four pillars of enterprise, employment, education and ‘everywhere’.
“We want stability and he’s trying to deliver that. It’s a real break from the past,” said Adrian.
Adrian outlined the economic challenges facing the UK amid high inflation. While wages are rising, he pointed out that Britons are now paying 14 per cent more in income tax that they were 18 months ago, mainly because of the freezing of personal allowances and the fact that people have moved into higher tax bands.
While Mr Hunt announced there would not be a technical recession, Britain’s economy is still contracting, said Adrian.
He added: “But that is changing. It’s all going in the right direction,” he added.
“Growth is the key. If we have growth, we will have more tax revenues.”
The Four Pillars
Adrian highlighted the increase in corporation tax, immediate tax relief on capital spending, competitive deregulation of medicines and medical technology, support for innovative industries such as film and artificial intelligence (including the new £1m Manchester Prize), enhanced research and development credits for research-heavy businesses, and support for nuclear energy and carbon capture, usage and storage.
Among the major announcements were moves to encourage older workers back into jobs through ‘returnerships’ and the pension changes.
Adrian pinpointed reforms to childcare provision, with up to 30 hours of free childcare for all under-5s, as the key Budget measure for this pillar.
Adrian spotlighted the creation of new investment zones, including ones in Greater Manchester and Liverpool, and moves to ‘catalyse innovation clusters’ plus business rate retention measures and greater local decision-making.
Research and development
James Thompson of HURST’s tax team outlined changes to the research and development tax credits system.
As previously announced, loss-making SMEs will from April be able to claim less relief (down from 14.5 per cent to 10 per cent of their surrenderable R&D losses), and James said this would unfairly punish early-stage, pre-revenue businesses which carry out a lot of R&D and rely on the system for cash.
The chancellor announced that this unfairness has been recognised, and he has increased the surrender rate back up to 14.5 per cent where a loss-making company spends at least 40 per cent of its total expenditure on qualifying R&D.
The current 130 per cent R&D deduction rate for SMEs will go down to 86 per cent on April 1, as previously announced.
James also said that HMRC is increasingly challenging R&D claims to stamp out fraud, and is allocating more resources to achieve this.
Changes to the pension rules has been a big Budget talking point. James said that, after a squeeze on pensions in recent years, the chancellor’s measures amounted to good news, with the abolition of the lifetime allowance of £1.07m, increasing the adjusted income threshold from £240,000 to £260,000 and allowing an increase in the annual contribution allowance from £40,000 to £60,000.
The increased contribution allowance was hailed as offering ‘significant benefits’ for owner-managers by giving those who can afford it the opportunity to use spare cash to boost their pension pots in a tax-efficient way.
However, James said the ‘sting in the tail’ on pensions is that, from April, the cap on the 25 per cent tax-free lump sum will be £268,275, which represents a quarter of the current £1.07m lifetime allowance.
Our Budget Review breakfast event attracted business leaders from a variety of sectors, including banking and finance, pharmaceuticals, manufacturing, communications, technology and IT and construction.
Looking for advice on the latest changes to come out of the Budget? Our skilled tax advisers can help you. Contact Adrian at firstname.lastname@example.org, or James at email@example.com for more information.