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UK spring budget: 25% corporate rate confirmed, 100% ‘full expensing’ introduced

Chancellor of the Exchequer Jeremy Hunt Budget Day
Chancellor of the Exchequer Jeremy Hunt on budget day, March 15 2023.
Rory Arnold / No10 Downing Street

The UK government is now committed to replacing the ‘super-deduction’ with a 100% capital allowances regime to offset the impact of the corporate tax rise to 25%.

UK Chancellor Jeremy Hunt confirmed plans to introduce ‘full expensing’ for three years and to raise corporation tax from 19% to 25% in his spring budget announcement today, March 15.

Businesses will be able to claim full expensing on capital expenditure, including investments in IT and other equipment, to reduce the impact of the higher corporate rate on their tax bills.

Hunt said he intends to make this capital allowances regime permanent. The Office for Budget Responsibility estimates that it will cost £9 billion ($10.8 billion) a year and increase business investment by 3% annually.

At the same time, the government will raise the annual investment allowance to £1 million. This allows 99% of businesses to deduct the full value of their investments from their tax bills.

UK companies investing in equipment had been able to claim a 130% tax deduction since 2021, but it had come to an end. This ‘super-deduction’ cost an estimated £25 billion in tax revenue over two years, while the full expensing regime is expected to be cheaper over the same period.

Corporate tax hike

The corporate tax rate will increase to 25% from April 1 2023, affecting companies with profits of £250,000 and over. Corporate tax had been set at 19% since 2015.

Small companies with profits up to £50,000 will continue to pay corporate tax at 19%, with profits in between being subject to a tapered rate.

This will still be the lowest corporate tax rate among the G7 countries. The tax increase is designed to balance the need to raise revenue with maintaining a competitive tax system.

Businesses will need to model the impact of the increase in the main rate of corporate tax, including the effect it may have on any exceptional tax-sensitive transactions and planning opportunities, with a view to ensuring that stakeholders fully understand the implications.

Although the 25% rate is only set to affect around 10% of businesses, the UK government had faced numerous calls from members of Parliament to scrap the planned increase. Meanwhile, the opposition Labour Party had criticised the inconsistency of corporate tax policy.

R&D and investment zones

Elsewhere, Hunt confirmed that the government will offer almost £1 billion for 12 new low-tax economic zones. This amounts to £80 million per zone over five years – totalling £960 million.

Businesses setting up shop in these investment zones may be granted tax relief on stamp duty, business rates and national insurance contributions.

Four of the 12 zones will be in Northern Ireland, Scotland and Wales. The other eight will be located in England, particularly in northern England and the Midlands. These new investment zones will operate in tandem with 12 ‘freeports’, which have their own tax and regulatory advantages.

Some UK companies will also be offered tax credits for research and development (R&D) whether they are in investment zones or not. SMEs will be able to claim a tax credit worth £27 for every £100 they spend if more than 40% of such spending goes to R&D projects.

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