Tomorrow’s headlines on the Spring Statement will cover the changes to fuel duty, national insurance, and income tax (in two years time). These reforms have the most direct impact on most people’s budgets, but beyond the headline announcements, there were a number of proposals that will affect entrepreneurs that went under the radar.
When the super-deduction is over, the UK is set to have one of the most punishing tax regimes for investment in the OECD. The Chancellor says that he is keen to address this. He floated five reforms he is considering
“1. Increase the permanent level of the Annual Investment Allowance, for example to £500,000. At its peak, this could cost around £1 billion in a single year. Previously an Annual Investment Allowance threshold of £1 million has covered around 25% of Annual Investment Allowance eligible plant and machinery expenditure.
2. Increasing Writing Down Allowances for main and special rate assets from their current levels of 18% and 6% to 20% and 8%. At its peak, this could cost £2 billion in a single year. This would particularly support those investing above the permanent Annual Investment Allowance level.
3. Introduce a First Year Allowance for main and special rate assets where firms can deduct, for example, 40% and 13% in the first year, with the remaining expenditure written down at standard Writing Down Allowances. At its peak, First Year Allowances of 40% and 13% could cost £3 billion in a single year. This would particularly support those investing above the permanent Annual Investment Allowance level. However, it may add a layer of complexity to the UK’s capital allowances regime.
4. Introduce an Additional First Year Allowance, to bring the overall amount that can be claimed to greater than 100% of the initial cost. An additional capital allowance of 20% in the first year, on top of standard Writing Down Allowances on 100% of the initial cost across the first and subsequent years. This would spread relief over time, while giving relief on over 100% of the initial capital cost. At its peak, an additional allowance of 20% could cost over £4 billion in a single year. It may add a layer of complexity to the UK’s capital allowances regime.
5. Introduce full expensing, to allow businesses to write off the costs of qualifying investment in one go. No other country in the G7 has implemented this on a permanent basis. Full expensing of plant and machinery could cost significantly more than the above options. At its peak, this could cost over £11 billion in a single year.”
We are big fans of full expensing, which we recommended in our 2018 report on Tax Reform for the All-Party Parliamentary Group for Entrepreneurship
The Chancellor was right to talk about how the UK spends less than half the OECD average on R&D and he is looking at ways to boost R&D spending. The interesting changes are:
“To support the growing volume of R&D underpinned by mathematical advances, the definition of R&D for tax reliefs will be expanded by clarifying that pure mathematics is a qualifying cost.
This spring, the government will launch a review into the Future of Compute, building on a range of compute work across government and in particular the Government Office for Science report on Large Scale Computing. In the past decade, compute has grown as a critical general-purpose technology for productivity, prosperity, and innovation, making it essential to review our compute needs over the next decade. Led by an external expert, the review will provide recommendations to form the basis of a long-term plan for the government’s approach to compute.”
If the Government is looking for ideas on cloud compute, they can read our report with Seb Krier where he calls for a pool of cloud compute credits for the UK’s R&D system and upgrades to public data infrastructure.
On AI:
“The government will partner with industry and academia to create 1000 new AI PhDs. The government will invest £117 million to create the PhDs through Centres for Doctoral Training (CDTs), with the investment further leveraging industry and university funding. This will build on the 16 existing CDTs across the UK, to train a new generation of AI researchers to develop and use AI in areas such as healthcare, climate change and creating new commercial opportunities.”
The government is extending the Annual Investment Allowance.
“To support businesses to invest and grow, the temporary £1 million level of the Annual Investment Allowance has been extended to 31 March 2023. This is the highest level of support for capital expenditure ever provided through the Annual Investment Allowance and provides generous relief for investment across over a million SMEs.”
And they are increasing the Employment Allowance again:
“In April 2020, the government increased the Employment Allowance from £3,000 to £4,000. Spring Statement announces a further increase from April 2022, meaning eligible employers will be able to reduce their employer NICs bills by up to £5,000 per year – this is a tax cut worth up to £1,000 per employer.”
For SMEs:
“The government has already reduced the burden of business rates in England. The business rates multiplier will be frozen in 2022-23, which is a tax cut for all ratepayers worth £4.6 billion over the next five years. Eligible retail, hospitality, and leisure businesses will also benefit from a new temporary 50% Business Rates Relief worth £1.7 billion.”
Sam has talked about Business Rates before. This policy will mean a bit more cash in the pockets of SMEs, but ultimately, we would like to see Business Rates replaced with a levy on unimproved land values, instead of what’s built on top.
Something else to look out for is the new Innovation Challenge.
“The launch of an Innovation Challenge to crowdsource ideas for how the government can operate more efficiently.”
We will keep our eyes-peeled for more details on this, which could be very promising.
In our Startup Manifesto with Coadec we called for the limits of EMI to be increased from a £30m asset capitalisation to £100m, and from 250 to 500 employees. As Coadec’s Dom Hallas tweeted, we are disappointed to see that there will be no changes to the Enterprise Management Incentive (EMI) scheme.
“At Budget 2020, the government launched a review of the Enterprise Management Incentive (EMI) scheme, to ensure it provides support for high-growth companies to recruit and retain the best talent so they can scale up effectively, and to examine whether more companies should be able to access the scheme. The government has concluded that the current EMI scheme remains effective and appropriately targeted.”