The Spring Budget is on Wednesday 15 March. Will the Chancellor use the Spring Budget as an opportunity to announce new tax measures and support for individuals, SME’s and industries?
What could potential new policies look like, and which industries would most benefit?
In this “wishlist”, our MHA specialists share their recommendations and predictions for tax measures and incentives that would encourage growth and investment where it is most needed, including for large corporates and SME’s, UK manufacturing, agriculture, and green incentives.
You can find more detailed analysis of each of these areas on the MHA Spring Budget 2023 hub.
Spring Budget 2023 – What can we expect?
Incentives for Business Growth
With widescale changes to tax policy unlikely, the government may focus on giving businesses incentives to invest. After increasing corporation tax from 19 to 25 per cent in his last fiscal announcement, it is important for the Chancellor to look at measures that will provide a platform for business growth.
Incentives for growth could include:
- investment into research and development, and plant and machinery.
- tax relief incentives for companies to invest in their productivity and growth.
- A replacement to the capital allowances super deduction (due to end on March 31), and further support for freeports and enterprise zones.
- investment in early-stage businesses such as the extension of the Enterprise Investment Scheme.
Support for SME’s
We need to see proposals that encourage growth, not just to balance public finances.
The Chancellor is expected to offer only limited help for companies, with no immediate tax cuts likely because of tight constraints on the public finances amid an expected economic downturn. It is understood there may be a successor to the “super-deduction” tax incentive.
The CBI has suggested that companies initially should be able to write off 50% of the cost of any capital spending against tax, with the arrangements becoming more attractive as public finances improve. This would give businesses an incentive to invest at a time when corporation tax is due to rise from 19% to 25%.
Reform of the business rates system to boost business start-ups, focusing tax relief on investment in green plant and machinery and providing vouchers to small businesses to help them invest in “green” improvements to their premises, could all help to incentivise SME’s to invest in growth.
Should the Chancellor not deliver a budget that incentivises & enable business to have the confidence to invest in growth, it risks tipping the UK into an avoidable recession.
Corporation Tax and Super Deduction
Unless the Chancellor drastically revaluates the proposed hike in corporation tax and replaces the super deduction (which expires at the end of March), the UK risks generating little to no growth in GDP this year.
Both reversing the corporation tax rise and filling the void from the end of super-deduction would reduce the effective tax rate on investment and increase investment and wages across the economy boosting GDP. The Chancellor must prioritise both in the Spring budget to restore some semblance of confidence to UK businesses.
To restore confidence across the economy and incentivise greater investment from businesses, corporation tax must be depoliticised, with the UK put back on the roadmap to 17% corporation tax and certainly not more that 20%.
There may be some debate as to whether the super deduction increased investment or simply prevented people deferring expenditure until tax relief could be obtained against a higher corporation tax rate but, notwithstanding, tax relief on capital expenditure is a key factor in making investment decisions.
Energy Windfall Tax
The government is unlikely to heed the calls to increase the energy windfall tax at the Spring Budget. Increasing narrowly targeted and supposedly short-term windfall taxes will undermine business and investor confidence and will do nothing to solve the wider energy and cost of living crisis facing the UK.
Instead, governments, including the UK government, should be focusing on improving fuel security and move away from being reliant on imported gas which has created the current market conditions, which the oil and gas and renewable energy companies have simply responded to.
The UK government should use the Spring Budget to incentivise new investment in grid infrastructure, better connectivity, and scalable energy storage capacity. Doing so would help shelter the UK from the short-term price volatility seen across Europe in the last year and bring long-term stability to energy prices.
Windfall Tax for Banks
When the general public are struggling to purchase the essentials and public services are facing more cuts, it is hard to argue against windfall taxes on banks.
Just like oil and gas companies, banks have seen increased profits due to the cost-of-living crisis and current market conditions. The big five banks have all recorded record profits, their highest since the 2008 financial crash.
However, it is worth noting that currently banks are paying a higher combined rate of corporation tax than most other companies. This will still be the case even following the reduction in the bank tax surcharge from 8% to 3% which comes into effect in April. Paired with the rise in corporation tax to 25% (also in April), banks will still be paying more than other companies albeit only 1% more rather than the 6% more they would have paid had the surcharge remained at 8%.
Given that the UK still needs to remain a competitive economy, any windfall tax should have a sunset clause that ensures the tax falls away after 3 years. Hopefully by then we will have ridden out the current volatile economic conditions.
UK Manufacturing
UK manufacturing is still dealing with multiple headwinds, including labour shortages, supply chain challenges, increasing interest rates and rising energy prices. What the sector needs is the ability to plan for the long term.
In the short-term, cliff edges represented by the end of the super deduction and the increase in Corporation Tax rates (April), as well as the end of the energy price support scheme (March 2024), are dampening investment.
We appear to have passed the peak of inflation and there’s a windfall in the public finances which creates room for the Chancellor to incentivise companies to invest and plan more for the longer term.
The absence of an Industrial Strategy is a very significant omission from the government, as it makes it much harder for businesses to focus on long-term planning. Greater support by the government on energy prices, should costs remain high past March 2024, will also provide much needed relief if the energy crisis continues.
There is an opportunity at this budget to provide the leadership needed and for the Chancellor to shows that the government believes in the sector.
Green Incentives
The government could use the Spring Budget to go further and faster on its sustainability commitments. Low carbon companies already contribute £70bn and 840,000 jobs to the economy1, however with greater investment and sector support, they could underpin the government’s levelling up strategy, drive economic growth and help meet the UK’s net zero greenhouse gas emissions by 2050.
Providing greater incentives for businesses to become green and install renewable energy solutions is key. Doing so would improve energy efficiency, support the overall net zero strategy, and alleviate the pressure businesses are facing from energy prices.
Reducing VAT on public charging for electric vehicles (EV) from 20% to 5% so it aligns with the rate for domestic charging is a must. Drivers with off-street parking currently only pay 5% VAT. This pointless disparity discriminates against drivers without driveways or garages and risks undermining the UK’s net zero strategy and dampening the recent growth of EV sales.
1 https://www.cbi.org.uk/articles/insight-for-business-on-the-uk-s-net-zero-transition/
Agriculture and Driving Green Transition
For the agricultural sector to reach UK net zero targets by 2025, the government needs to be a focus on maintaining green incentives for farming and sort out issues with tax reliefs.
The government must make clear its intentions to extend R&D and related tax reliefs on energy efficient solutions and to maintain existing reliefs for installing wind, solar, and other green technology on farmland.
While the introduction of Bio-Diversity Net Gain schemes in 2021 was widely welcomed by the sector as a means to protect the natural environment, many farmers are confused as to how it impacts their Capital Gains and Inheritance tax (IHT) positions. Clearer guidelines and legislation would empower farmers to make confident decisions and ultimately encourage greater use of the scheme.
The sector will also be hoping for renewed assurance on the long-term security of Agricultural Property Relief (APR), which provides farmers with much-needed relief from IHT.
Within the capital allowances regime, while the super deduction is expiring on 31 March, a similar deduction for unincorporated farming businesses would be very welcome. The Spring Budget presents an opportunity for the Chancellor to right that wrong, especially at a time when our food security is more important than ever.
Investments and Markets
The optimistic news about the UK’s balance sheet could provide the Chancellor with the license to be more creative in his economy-boosting solutions.
However, with the Bank of England (BoE) still tightening monetary policy, it is important that any policy announcements are not inflationary in the short run. They need to give the impression of a united front, rather than trying to pull in opposite directions, which would likely result in the BoE hiking interest rates even further to compensate.
There may be some giveaways in the form of an extension of the fuel duty cut or to scrap the previously announced rise in April of the energy price guarantee. Those hoping for more, though, could be left disappointed, with the Chancellor likely to wait until next year before firing up some pre-election policies aimed at winning back public opinion. With inflation trending lower and predicted to fall through this year (Citigroup now forecasting UK inflation at 2.3% in November), the BoE would certainly prefer Mr Hunt keeps most of his rabbits in the hat for a while longer.
Motor and EV Landscape
To boost confidence and productivity in the motor sector, the Government needs to provide clarity on the ZEV mandate - its timings, targets, and sanctions for non-compliance. VAT harmonisation between public and private charging would also be helpful. Reducing VAT on public charging would help maintain the significant total cost of ownership advantage that EVs held over ICE prior to the turmoil in energy markets. Fossil fuel producers should be price capped in terms of how much they charge for electricity going into EVs.
To boost EVs production and infrastructure especially since we are aiming to transition to a net-zero economy, the UK will need more domestic battery production if it is to remain competitive in accommodating vehicle manufacture and the growth of the renewables sector. Batteries and recycling should be receiving very favourable investment conditions to support the development of several Gigafactories that will be needed to support the move to Net Zero. We are in danger of falling behind the US and other European neighbours in term of investment in this technology. Continued dependence on Chinese battery imports is a very risky strategy.
EV adoption is at a pivotal point. The easier part is done but we need to ensure that early adopters continue to lease or buy EVs whilst encouraging more drivers to make the change. If the total cost of ownership between ICE and EV continues to narrow and the customer experience is poor then, progress will stall. Customers will lose confidence in the product and residual values will impact the affordability. We cannot allow this to happen as decarbonising road transport is pivotal to the government’s Net Zero Strategy.
For more insights like this...Visit our dedicated Spring Budget 2023 hub
You’ll find resources and practical guidance on any new tax measures and spending policies announced, to help you prepare and manage the potential impact on you and your business.
