Financial Model Audit: The joy of finding an error (early)

On 15 March 2023, the Chancellor of the Exchequer, Jeremy Hunt, delivered his latest UK Budget. The increase in the main rate of corporation tax to 25% from 1 April 2023 is confirmed. Full details of the Budget measures can be found here.

The Chancellor put forward a number of business measures which he hopes will lead to economic growth. The three major areas for this were around capital allowances, investment zones, research and development tax credits. Companies in the project finance sector may be able to benefit from some of these measures.

Capital Allowances

The government introduced the capital allowances super-deduction in 2021 to encourage business investment, but this regime is coming to an end on 31 March 2023. The government is replacing it with two new measures to give companies earlier tax relief for capital expenditure on plant and machinery, one for main rate pool expenditure, and one for special rate pool expenditure.

Main Rate Pool – Full Expensing (FE)

From 1 April 2023 until 31 March 2026, companies can claim 100% capital allowances on qualifying main rate pool plant and machinery. It is effectively a 100% first year allowance.

Under FE, for every pound a company invests, its taxes are cut by up to 25p.

Special Rate Pool – 50% First Year Allowance (FYA)

For assets that fall within the special rate pool regime and are therefore not eligible for FE, there is a 50% FYA, subject to the same conditions as for FE.

There are special rules for the disposal of assets on which FE or the FYA have been claimed. There will be a balancing charge of 100% of the sales proceeds for the FE asset, and a balancing charge of 50% of the sales proceeds for the FYA asset.

Investment Zones

These have been mentioned in a number of recent budgets and fiscal statements, and are back in a revised form. At the most recent autumn statement, the Chancellor announced that the government would launch a refocused investment zones programme, aimed at catalysing a small number of high-potential clusters. The sectors which the government hopes to encourage are green industries, digital and tech, life sciences, creative industries, and advanced manufacturing.

The scheme proposed in the Budget is for 12 investment zones across the UK, including 4 across Scotland, Wales, and Northern Ireland, to be discussed with the devolved administrations. Other areas can apply.

The first 8 areas which the government has identified to begin discussions with in England are covered by:

• The proposed East Midlands Mayoral Combined County Authority

• Greater Manchester Mayoral Combined Authority

• Liverpool City Region Mayoral Combined Authority

• The proposed North East Mayoral Combined Authority

• South Yorkshire Mayoral Combined Authority

• Tees Valley Mayoral Combined Authority

• West Midlands Mayoral Combined Authority

• West Yorkshire Mayoral Combined Authority

Each investment zone will receive a funding envelope of £80m. Investment zones can opt to use this in a mix of tax reliefs and spend, or only spend, so can use the envelope flexibly. Tax incentives for an investment zone can cover up to 600 hectares for one site or across up to 3 x 200-hectare sites, lasting for 5 years. The precise costs will vary by site, however the government estimates that a 600 hectare site would receive around £45m of tax reliefs, to be deducted from the overall £80m envelope available to each investment zone. Where investment zones do not opt for the maximum tax offer, tax incentives can be exchanged for a greater amount of spend up to the maximum of £80m.

The proposed tax incentives are:

a) Stamp Duty Land Tax (SDLT): a full 100% SDLT relief for land and buildings bought for commercial use or development for commercial purposes.

b) Business Rates: 100% relief from business rates on newly occupied business premises, and certain existing businesses where they expand in English investment zone tax sites.

c) Enhanced Capital Allowance: 100% first year allowance for companies’ qualifying expenditure on plant and machinery assets for use in tax sites.

d) Enhanced Structures and Buildings Allowance: accelerated relief to allow companies to reduce their taxable profits by 10% of the cost of qualifying non-residential investment per year, relieving 100% of their cost of structures and buildings over 10 years.

e) Employer National Insurance Contributions Relief: zero-rate employer NICs on salaries of any new employee working in the tax site for at least 60% of their time, on earnings up to £25,000 per year, with employer NICs being charged at the usual rate above this level. This relief can be applied for 36 months per employee.

Research and Development

The government is extending the scope of qualifying expenditure to include the costs of datasets, cloud computing and pure mathematics. There is also a new enhanced credit scheme for smaller research-intensive companies which spend 40% or more of their total expenditure on R & D whereby they can claim £27 of credit for every £100 of spend if they are eligible loss-makers.

Our View

As the main rate of corporation tax is increasing to 25% on 1 April 2023, the government is keen to tackle the relatively low rate of business investment in the UK compared with other countries by using other tax levers. As the super-deduction regime is coming to an end, the Chancellor is keen to find a replacement and is pinning his hopes on his new capital allowances schemes. For project finance companies, the timing of capital expenditure is often inflexible and driven by non-tax requirements, so as with the super-deduction, the proposed new reliefs may be tricky to access. For those companies that can influence the timing of their capital spend, there may be scope to take advantage of the new reliefs. However, the interaction with the UK’s carried forward loss restriction rules may make claiming the proposed reliefs more expensive in tax terms for some companies than choosing not to claim them. 

If you have any questions relating to the budget, and how it affects you as a Project Finance professional then please get in touch.