A ‘Budget for growth’, but what does it mean for Midlands businesses?

Jeremy Hunt announced with great conviction earlier this month that his first Budget was a 'Budget for growth'. It pivoted on four key elements - Enterprise, Education, Employment and Everywhere - supported by the Office for Budget Responsibility's (OBR) forecast that the UK will no longer enter a technical recession in 2023, with inflation falling by more than half to 2.9% by the end of the year.

While the Chancellor stated that the Government's plan for the economy was 'working' and the British economy was 'proving doubters wrong', the OBR predicts that the economy will still contract overall by 0.2% in 2023, and living standards are expected to fall by the largest amount since records began.

As with any Budget, the biggest question everyone was left asking was, 'what’s in it for me?' and what does it mean for owner-managed businesses (OMBs) beyond the headline grabbing four Es?
 

Levelling up

The Budget undoubtedly answered some of the calls from Midlands OMBs, as the region fared relatively well as part of the overall 'levelling up' agenda. As part of our bi-monthly survey of 500 mid-sized businesses, more than a quarter told us that they wanted to see tax incentives in the region. With East and West Midlands set for an opportunity to bid for funding for a new Investment Zone, this could come to fruition.
 

Business investment

Businesses were hoping for a roadmap to reduce corporation tax rates. As expected, that failed to materialise, with the headline rate rising from 19% to 25% from 1 April as planned. Instead, the Chancellor announced the 'most generous capital allowance scheme of any advanced economy'. At the end of March, OMBs will no longer be able to take advantage of the generous capital allowances '130% super-deduction'. But in its place is 'full expensing' for capital spending until at least 2026. This is a very welcome development which underlines the importance of business investment to the economy.

The scheme means that companies will be able to offset 100% of investment in IT, equipment, plant, and machinery in the UK against taxable profits. This offers a significant cash flow benefit for companies who will be able to write off certain types of capital expenditure in one year.

The first-year allowance (FYA) of 50% will also continue to be available for expenditure on new and unused special rate plant and machinery, including integral features in a building, and long-life assets. Smaller businesses will also be able to claim 100% relief against such asset investments if their £1m Annual Investment Allowance is available to cover them.
 

Uncertainty continues over R&D

While we will have to wait for longer term reform of the R&D tax relief regime, the Budget included new changes taking effect from April 2023 and previously announced changes delayed until 2024.

Changes to the rates of R&D relief (lower for SMEs but higher for larger businesses) originally announced at the Autumn Statement last year are due to take effect from April 2023. These previously announced changes had meant that small loss-making companies, such as biotech and tech start-ups, were expecting to see their effective rate of subsidy through the repayable R&D credit fall from 33.4% of costs to just 18.6%. However, the Chancellor announced at the Spring Budget that where such loss-making businesses have qualifying R&D expenditure of more than 40% of their total annual costs, they will be able to claim a repayable credit of 27% of their costs. So while these R&D-intensive businesses will still lose some funding support from April 2023, the impact will be less than previously anticipated.

There was also positive news for the UK creative sector with increases in tax relief for Film, TV and video games businesses in addition to an extension of the existing post-COVID higher rates of tax relief for theatres, orchestras and museums.

The draft legislation designed to prevent companies from claiming R&D relief in the UK for project work performed overseas has now been delayed until April 2024 when the government plans an even larger overhaul to the UK’s R&D rules. This will see both the current R&D tax relief schemes unified into a single comprehensive regime. This delay will be welcome news to those affected, but it may only be a postponement of the inevitable.
 

Skills and talent

All year round, OMBs tell us that access to skills is their biggest challenge. Hopefully, new initiatives and incentives will open up a deeper talent pool by attracting returners and working parents back to work. Support with childcare costs will also be well received by business leaders as a way of helping employees with the cost-of-living crisis. Around one-in-ten Midlands businesses have already been trying to plug this gap, by providing other workplace benefits such as support with childcare costs for employees.

Given the constraints of the public finances, the Chancellor made some sensible policy announcements. However, within the context of high business tax rates and inflation, they’re unlikely to significantly impact UK economic growth.

If you would like to discuss the Budget in more detail, contact me on paul.townson@bdo.co.uk or read further analysis on the Chancellor’s statement here.