Full Expensing Regime Made Permanent
The biggest tax relief announced by the Chancellor for businesses is that the full expensing regime has now been made permanent. The policy, announced in the Spring Budget 2023, was originally due to end on 31st March 2026.
Full Capital Expensing (effectively 100% tax relief, called a ‘First Year Allowance’), enables businesses to deduct the cost of any eligible investment from their corporation tax bills in one go, rather than over several years.
Up to April 2023, businesses could only deduct a small fraction of the cost of an investment each year over the accounting lifespan of the investment. In reality, this meant that businesses wouldn’t get the full cost of the investment, because inflation eroded the value of the money firms could claim back in future years. So, the longer the right off time, the less of the cost of the investment that could be written off.
Now, businesses will be able to deduct the cost of any eligible investment from their corporation tax bills straight away.
The full expensing regime allows companies to claim 100% first-year relief on qualifying new main rate plant and machinery investments.
So, companies paying the main rate of corporation tax get tax relief of 25p for every £1 of qualifying expenditure.
Full expensing operates alongside a 50% first-year allowance for expenditure by companies on new special rate assets (such as integral features, long-life assets, etc). This means that a company can claim a deduction from taxable profits that is equal to 50% of their qualifying expenditure in the year that expenditure is incurred. The 50% first-year allowance will also become permanent having been also due to end in 2026.
It should be noted that full capital expensing is only available to companies who pay Corporation Tax.
Unincorporated businesses cannot claim, but they are entitled to claim the Annual Investment Allowance which offers the same benefits as full expensing for the investments it covers.
The Annual Investment Allowance is now permanently set at £1million. However, the full expensing regime is not limited to the £1m threshold.
What does this mean for business owners?
As we said in April after the Spring Budget, these changes will mainly be of interest to companies that have already used the £1 million Annual Investment Allowance which is a simpler allowance.
In theory, this is a great policy for construction, engineering, and manufacturing clients.
We had previously criticised the government for imposing the 2026 deadline in the Spring Budget so it’s good to see the policy extended permanently. It gives businesses more certainty and a chance to plan their investments.
Ironically though, removing the 2026 deadline may actually lead to reduced investment as businesses no longer have to push their investments forward.
In reality however, this policy will only really benefit the largest, profitable construction, engineering and manufacturing businesses planning significant investments.
While these large companies have a critical role to play in driving the economy, smaller SMEs or businesses based in service sectors – which make up the majority of UK industry! – will not see much benefit from this announcement.
It’s also true that many businesses are simply trying to get through this difficult economic period, so it’s unlikely that they will be planning any significant investments in plants or machinery.
Giving businesses additional capital allowances entitlement should be applauded but the impact on SMEs and the majority of businesses is unlikely to be as great as the chancellor suggests.
How Leonherman can help:
Capital Allowances are a complex area of UK tax as there are different types of allowances with their own qualifying rules and limits.
Crucially, you need to make sure that your business is claiming allowances wherever possible to reduce your tax bill.
If you’re unsure about what allowances your business is entitled to, then get in touch with us without delay. We will make sure you get the full allowances to which you are entitled.
R&D Tax Regime Simplified
In yet another major change to the R&D tax credits scheme, the Chancellor confirmed that the two existing R&D tax relief schemes will merge with effect for accounting periods from 1st April 2024.
Currently, there are 2 schemes for providing tax relief for qualifying R&D expenditure: enhanced tax relief and payable credits for qualifying SME expenditure; and R&D expenditure credit (RDEC) for all other claims.
For expenditure incurred on or after 1st April 2024, these schemes will be combined.
The new merged scheme will provide relief at the current RDEC rate of 20% aside from loss-making companies and R&D intensive companies.
In the merged scheme, the notional tax rate applied to loss-makers will be the small profit rate of 19%, rather than the 25% main rate currently set in the RDEC.
Since 1st April 2023, R&D-intensive companies have been eligible for enhanced relief (retaining the payable tax credit rate of 14.5% compared to the reduced 10% rate).
R&D intensive companies will also be able to make enhanced claims.
The definition of an R&D intensive company used to be that at least 40% of its overall expenditure qualified for R&D relief. This has now been reduced to 30% along with a year of grace recognising the challenges of identifying R&D intensive companies where the percentage is close to the threshold. The Chancellor claims this policy will benefit an additional 5,000 SMEs.
In another important change, from April 2024, boutique R&D companies will not be allowed to be nominated as the recipient of R&D refunds from HMRC. These payments can only go to the company making the claim itself, who must then pay their R&D agent.
What does this mean for business owners?
Claiming tax credits on R&D should be an attractive proposition for all companies carrying out innovation projects.
But the reality is that despite claiming that they have simplified the system, the R&D tax regime is still very complicated, and SMEs genuinely undertaking eligible R&D do not know how to claim or if they’re eligible to claim tax credit.
And once a claim is made, there are often legitimate concerns about whether the claim complies with HMRC’s new, stricter rules.
It’s also true that HMRC have launched a crackdown on fraudulent claims and on dubious agents operating in the R&D tax credits reclaim space.
And finally, because the changes are coming into force in April 2024, businesses have been given very little chance to adapt to the changes.
The Institute of Chartered Accountants in England and Wales (ICAEW) through whom we are regulated have already said that “There is insufficient time for companies to get to grips with the new rules, especially SMEs who are unlikely to have any dedicated in-house tax resource.”
How Leonherman can help:
Let’s make it simple.
If your business is planning an innovation project or carrying out innovative projects and you’re unsure if you can make an R&D tax credit claim, get in touch with our R&D experts.
We will help you better understand what constitutes a valid claim for R&D tax credits with HMRC. We will let you know if we think you will have a valid claim, and importantly, we will tell you if we think you don’t have a valid claim and whether we feel it’s worth your time putting forward a claim or not.
If there is a legitimate R&D tax credits claim, we will:
- Ensure the work that you will be putting forward for a claim is structured accordingly into the relevant process elements of R&D, to ensure that the maximum potential claim value can be harnessed;
- We will ensure your research is well documented in a manner that supports a review of the research by HMRC should they deem it necessary;
- We will help you to engage legal advice, to ensure contracts with third parties, be they clients or subcontractors, enshrine the ownership of the research with you, the claimant;
- We will compile your R&D claim, report and HMRC AIF, maximise the claim value and ensure key HMRC tests for any valid claim are met, and you can be safe in the knowledge that we are a regulated, independent specialist.
Employee National Insurance Cut
The Chancellor announced that the main rate of employee National Insurance (class 1 NIC) will be cut by 2% from 12% to 10%.
The Class 1 NIC rate will remain at 2% for earnings above £50,270 a year.
Importantly, this change will take effect from 6th January 2024 – not April as is usual for most announcements.
It is estimated that 27 million workers will now pay 10% on their earnings between £12,571 and £50,270 instead of the current 12%.
Workers earning more than £50,270 a year will receive a NIC reduction of £754. The cut is worth £450 a year to a worker earning £35,400.
What does this mean for business owners?
Crucially, there has not been a cut to employer’s NIC which remains at 13.8%. Therefore, employers are unlikely to see much benefit from this reduction in NICs. Many employers would have hoped for a reduction in employer’s NIC to offset the significant increase in the National Living Wage.
For Directors, the annual NI rate will be 11.5% so the change announced in the Autumn Statement will make very little difference for Directors.
One question is whether employees should defer any imminent Christmas/End of Year bonuses until after 6th January? The reality is that the benefit from deferring any bonus payments to January will be extremely minimal for the employee, who will probably still prefer the bonus before Christmas!
How Leonherman can help:
Because this NIC change comes into force on 6th January 2024, it is very important that you update your payroll before this date or make sure your payroll provider will make the changes for you.
If you already outsource your payroll to us, then you can relax as we will take care of the change for you. If you don’t outsource your payroll to us, then get in touch with us without delay and we can take this burdensome task off your hands.
Self-Employed National Insurance
The Chancellor announced major reforms to National Insurance for the self-employed.
Self-employed individuals with profits of more than £12,570 a year pay two types of NIC: Class 2 and Class 4.
From 6th April 2024 – not 6th January – Class 2 National Insurance contributions will be abolished entirely – saving the average self-employed person £192 a year.
Importantly, Class 2 NICs currently provide self-employed people with access to a range of state benefits, including the State Pension.
From 6 April 2024, self-employed people with annual profits:
- Above £12,570 – will continue to receive access to the benefits.
- Between £6,725 and £12,570 – will continue to receive access to the benefits, via a National Insurance credit.
- Under £6,725 (or with losses) – will be able to continue to pay Class 2 NICs on a voluntary basis in order to maintain their access to state benefits. Class 2 NICs had been due to increase in 2024/25 but it seems that these will be maintained at the current £3.45 weekly level for those in this bracket.
In another announcement, from 6th April 2024, Class 4 National Insurance for the self-employed will also be cut by 1%.
Self-employed people will pay 8% on their profits between £12,571 and £50,270, instead of the 9% they pay at the moment. National Insurance on income and profits above £50,270 will stay at 2%.
Taken together these changes will result in an average self-employed person with profits of £28,200 saving £336 in 2024/25. However, they won’t see the benefit until 2025!
What does this mean for Self-Employed Business Owners?
One question we’re regularly asked is “Whether I should trade as a sole trader, partnership or Limited Company?”
After these changes announced by the Chancellor, especially the changes to Class 2 NICs, it is now less expensive to be self-employed and to operate as a sole trader or partnership. So purely from a tax perspective, it is cheaper to remain unincorporated.
What’s more, for Limited company Directors, dividend income attracts a 0% dividend allowance of £500 in 2024/25, down from the £1,000 allowance seen in 2023/24 so it is now more expensive to extract profits from a Limited company.
However, there are many good commercial reasons to operate as a limited company, particularly the limited liability provisions.
How Leonherman can help
We work with many start-up businesses. Some of these are unincorporated and some are incorporated. If you’re planning to set up a business, before you make any decision to trade as a sole trader or limited company, we advise you to get in touch with us to discuss the different ramifications of each choice.
National Living Wage to Increase
The Chancellor confirmed that the National Living Wage – also known as the national minimum wage – would increase to £11.44 per hour from April 2024, and in a major change, this will also apply to 21 and 22 year olds.
The announced pay rises represent a 9.8% increase for over-23s and a 12.4% jump for workers aged 22 and 21. The national living wage is currently £10.42 an hour for workers over 23.
This is great news for many employees. A full-time worker, aged 23, on the national living wage will get a pay rise of £1800 per year.
The National Living Wage will also increase for younger employees. For 18 to 20-year-olds it rises from £7.49 to £8.60 an hour. For under-18s it will rise from £5.28 to £6.40 an hour and the apprentice rate will go up from £5.28 to £6.40 an hour.
What does this mean for employers?
For employers, this is a mandatory pay uplift and will add to costs at a time when prices are already rising significantly.
Disappointingly for many employers, there isn’t an employers’ National Insurance cut so the government hasn’t given business owners much help to pay for the rise in staff costs.
Many business owners have also pointed out the rise in the national minimum wage is likely to increase wage costs throughout the business as more senior members of staff are unlikely to accept a similar level of pay as more junior employees.
How Leonherman can help:
These changes take effect from 1st April 2024. If you already outsource your payroll to us, then you can rest assured that we will take care of the wage payments for you. If you don’t outsource your payroll to us, then get in touch with us without delay and we can take this task off your hands.
Many business owners will also rightly be concerned about the cashflow implications of these changes. We’re still regularly surprised by the number of businesses who don’t have a clear and up to date cashflow forecast at a time when costs are rising.
If you’d like help preparing a cashflow forecast for your business, please get in touch with our accounting experts and we’d be happy to help.
Additional Key Measures Announced
For 2024/25, the small business multiplier will continue to be frozen and the 75% Retail, Hospitality and Leisure business rates relief will continue to apply. These are not new reductions but a continuation of existing reliefs.
The standard rate multiplier will be uprated in line with the September 2023 CPI of 6.7%.
While this will increase business rates bills for some, the government could argue that larger businesses could benefit from hundreds of millions of pounds of tax relief per year, due to full expensing.
However, as we’ve already pointed out, full expensing will only benefit the largest of companies making huge investments. For the majority of SMEs and service businesses, the increase in business rates will bite, at a time when costs continue to rise.
Getting Paid on Time
We know that one of the key challenges facing SMEs is the cash-flow implications of late payments, which hold them back from investing and innovating.
The government plans to introducing more stringent payment time requirements for firms bidding for large government contracts.
From April 2024, firms bidding for government contracts over £5million will have to demonstrate that they pay their own invoices within an average of 55 days, tightening to 45 days in April 2025, and to 30 days in the coming years.
This should be good news for smaller businesses who supply to these larger businesses carrying out government contracts.
Upskilling the workforce
Increasing productivity and keeping skills relevant are particularly important issues for SME business owners, particularly with the rise of Artificial Intelligence and other technological advances.
The government announced that there are various initiatives on the cards for business leaders to acquire the vital skills and opportunities they need to stay relevant and to grow their businesses.
There will be a particular focus on sole traders and the self-employed where the tax deductibility of training costs is not always clear for business owners.
Basis Period Reform – A Major Change for Unincorporated Businesses
From 6th April 2024, unincorporated businesses who prepare their accounts to a date other than 31st March or 5th April must use the tax year as their basis period, regardless of their accounting period. More details of the Basis Period Reform can be found here.
If you are the proprietor of an unincorporated business whose accounts are prepared to a date that isn’t 5th April or 31st March, you will need to decide whether you want to move your accounting period year end, or keep it the same.
Each decision will have ramifications on your tax due, cashflow and ongoing accounting processes.
Importantly for businesses affected, the transition will take effect in the tax year to 5th April 2024, starting on 6th April 2023.
Please note that basis period reform is different to Making Tax Digital for Income Tax and will affect all unincorporated businesses, even those not affected by MTD for Income Tax.
Rest assured that all our clients who will be affected by this change will be contacted separately.
If you’re not a client of ours but are concerned about whether these changes might affect you or how they might affect you, particularly with regards to your cashflow, please don’t hesitate to get in touch with our expert accounting team today and we would be happy to advise you.
Unincorporated Businesses: Using the ‘Cash Basis’ to Compute Business Profits
The ‘cash basis’ can be a simplified way of calculating taxable profits for income tax purposes.
It is based on simply declaring income received and expenses paid, without adjustments seen in more sophisticated accounts prepared in accordance with traditional ‘accruals based’ principles (e.g. to include adjustments for stock valuations and amounts owed by customers).
Importantly however, “cash basis” doesn’t provide the best business information to a business owner.
Currently, a sole trader or partnership can choose to use the cash basis if their annual business turnover is less than £150,000. Not the best business information.
In a major change, from 6th April 2024, the turnover threshold of £150k will be removed and any size of unincorporated business can use the cash basis.
Crucially, “cash basis” will become the default – unless a business owner chooses to opt out and to use the accruals basis.
If you are an owner of an unincorporated business, then we would advise you to speak with us about these changes.
You can ‘opt out’ of the cash basis and continue to prepare a balance sheet and use the ‘accruals basis’ if you wish after April 2024.
This will be an important choice, particularly in relation to the business intelligence and management reporting you get from each option, so please talk to us about the options if this affects you.
Alcohol Duty Frozen
Alcohol duty has been frozen until 2024 in a move which should help the hospitality sector. The freeze should see around 3p taken off the duty cost of an average pint of beer.
If you have a question about any of these measures announced by the Chancellor, and how they might affect you and your business, then please get in touch with us and we would be happy to help.
Call us on 0161 249 5040 or email: email@example.com
This material is published for client information. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by Leonherman.