The government’s spring budget last week threw up a lot of questions for business owners, with changes to corporation tax rates, the removal of the super deduction, and the addition of new reliefs and incentives. It’s been a challenge for many business leaders to work out where they stand, so to offer some clarity and guidance on the subject, we invited Neil Stockham, Corporate Tax Partner at BDO, to join our Ask an Expert podcast.
Neil leads BDO’s tax services for the retail and consumer sector. He works with a wide range of clients, from small, owner-managed businesses, private equity backed enterprises, all the way through to large, renowned businesses with household names. With such a wealth of experience and insight, we could think of no one better to shed some light on the developments revealed by the Chancellor last week.
Corporation Tax Changes
To kick off our conversation, we delved into the changes being made to the headline rate of corporation tax. We’ve known for some time that the government will be raising the rate from 19% to 25% from the 1st of April 2023 – with the 25% applying to profits over £250,000 and the 19% rate being retained for profits up to £50,000 – but Neil was keen to expand on the details, beginning with the marginal rate.
Neil Stockham’s CV//
2014-Present // Tax Partner (Corporate M&A Tax Services) – BDO LLP
2003-Present // Tax Partner (Retail Sector Tax Specialist) – BDO LLP
1998-2003 // Private Equity Tax M&A – Ernst & Young
1995-1998 // Corporate Tax Consultant – PricewaterhouseCoopers
“If you make profits between £50,000 and £250,000”, he began, “you’ll be paying 26.5% on those incremental profits…so if you’re making a profit of £100,000, for example, you will pay something like a 22% effective rate.” The idea behind this is to gradually increase the effective rate so that it scales linearly from 19% at the bottom of the spectrum to 25% at the top.
Neil then explained what the changes mean for organisations comprised of multiple entities. “For groups, the upper and lower limits are divided by the number of associated companies”, he revealed. “So, if you’re in a group of two – a holding company and a trading company – the limits will be halved to £25,000 and £125,000.” If you do operate in a group, it is vital to bear this in mind to make sure there are no surprises in your forecasts.
But how should these changes impact your strategy? “If you’ve made profits in the past, but you’ve had a couple of loss-making periods – COVID impacted, etc. – you need to think very carefully about what you do with those losses”, Neil warned. “You’ve probably got scope to carry them back and generate a tax repayment of something like 19 or 20%…but if you know you’re going to make profits after the first of April, clearly the relief is more valuable at 25%.”
The Super Deduction
The removal of the super deduction was another cause for concern for some businesses in the lead up to the spring budget. Currently, organisations can benefit from a deduction of a whopping 130% for capital expenditure incurred on purchases of IT equipment or plant and machinery. Unfortunately,from the 1st of April 2023, this deduction will disappear.
“Prior to the budget, we were expecting a bit of a cliff edge”, Neil admitted, “with the super deduction set to disappear, the headline rate to increase by 6%, and with the annual investment allowance being reduced from £1m to £200,000.” But in an effort to ease these concerns, the Chancellor has introduced an expensing regime he has labelled the ‘investment deduction’. “If you’re spending £100,000 on IT or plant and machinery, you will now get a deduction in year one of that £100,000 against your taxable profits”, Neil explained.
“This is an accelerated tax benefit and cash-flow benefit”, he continued, which gives businesses the means to give their cash-flow a significant boost. On top of that, enterprises will be able to benefit from a 50% deduction for expenditures outside of plant & machinery and IT. “The 50% deduction is there in year one for things we call ‘integral features’”, Neil shared. “That’s things like electrical wiring, lighting systems, things inside buildings.”
Although this benefits businesses who deal in tangible goods a lot more than it does tech or e-commerce businesses, for instance, it is a positive change overall. “The important message is that we were expecting companies with relatively small capital spend to be worse off”, explained Neil, “but they’re actually going to be slightly better off when you work out the effective rates and things like that.”
R&D Tax Relief
The final section of the budget that will be of major consequence to business leaders is the shift in policy on R&D tax reliefs. “It’s a very valuable relief”, Neil admitted, “which is there to encourage investment in innovation, research, and development when you’re doing something ‘groundbreaking’”.
Currently, profitable SMEs receive a 130% deduction on their R&D spending in addition to the initial cost. So, if you spend £100 on something innovative, you’ll receive a deduction of £230. If you’re loss-making, on the other hand, you can either add the £230 to your loss pot to carry forward or take 14.5% of that amount as a cash payment right away.
As of April 1st, the deduction is being lowered from 130% to 86% and the 14.5% repayable credit is reducing to 10%. This is to combat the tidal wave of ‘reckless and overinflated’ claims the Revenue is faced with under the current system. “There is one saving grace, though”, claimed Neil. “For SMEs who spend more than 40% of their cost pot on R&D, that 14.5% will essentially be retained.”
If you’re looking for a quick summary of the budget, the bottom line is that those paying tax will be paying more, unless they’re very small or R&D intensive. On the other hand, Mr Hunt’s changes have opened the door to ways to increase cashflow, particularly with the full expensing regime in year one, which, for many, could be the difference between failure and survival.
To conclude, here are Three Things – three pieces of actionable advice we extracted from our conversation with Neil – that you can implement today to navigate the changes made in the budget:
Think carefully about what to do with your losses.
The dilemma here is immediate cash versus the absolute benefit to your future business. Cash in the bank is never a bad thing, especially during the current economic climate, but ask yourself if it’s absolutely necessary to have it right now. If your business can survive without it until you generate a profit, it’s probably better to carry your losses forward.
Work out where you stand.
This is especially pertinent for businesses who have frequently benefitted from R&D tax reliefs in the past. If you’re relying on one of these reliefs to balance your books, or to keep your cashflow healthy, it’s paramount that you make sure you can still count on receiving it.
Enlist the help of a financial advisor.
Tax, by nature, is extremely complicated. If you remain unsure about how best to proceed, it is well worth your time and money to get an expert’s opinion. “If you’re going down this route [interacting with the tax benefit system], you need to follow the rules and do it properly. Get some help from an advisor to navigate those rules and make a robust and effective claim.”
We must extend our gratitude to Neil for helping us to make sense of what is an incredibly important series of changes, especially on such short notice. If you would like to listen to the entire conversation, you can do so by clicking here.
If you, or any other business leaders you know, are facing challenges as a result of the Chancellor’s latest announcement, apply to All Together today for up to 5 hours of pro bono advice from one of our vertical specialists.