Economics » Investment » UK’s Chancellor announces moves to promote business investment and deal with labour shortages

UK’s Chancellor announces moves to promote business investment and deal with labour shortages

Corporation tax increase goes ahead but some business fillip with investment allowances

The UK government will go ahead with the planned corporate tax increase in April, despite an improved economic outlook the UK’s chancellor Jeremy Hunt announced today (March 15).

During his budget announcement, Hunt stressed “this is not the time for tax cuts” and confirmed the planned corporation tax increase from 19% to 25% would go ahead in April 2023. This higher rate will only apply to the 10% of companies which are the most profitable.

During his statement, Hunt noted the UK economy would not enter a technical recession this year; it will contract by 0.2% in 2023, before growing by 1.8% in 2024, according to the Office of Budget Responsibility’s forecast.

The UK government, Hunt said, is on course to meet its fiscal rules to reduce debt as a percentage of GDP in five years’ time, with this falling to 92.4% of GDP next year. The government is also on target reduce borrowing to 3% of GDP in five years’ time (2027/28) and has a fiscal buffer of £6.5 billion, according to the OBR.  Inflation is also expected to fall to 2.9% by the end of 2023.

Describing it as a ‘Budget for Growth’, Hunt identified removing obstacles to investment, dealing with labour shortages and supporting the innovative industries as his three key areas of focus.

“As expected, changes in taxation policy have largely been avoided. Spending measures have been carefully targeted at easing conditions in the labour market and stimulating high growth business sectors.” said Alex Hutton-Mills, managing director at Cardono Advisory.

“Structural constraints upon labour supply, and their consequential effects upon wages and inflation, remain as a key risk to the Bank of England’s forecasts.”

Contrary to the OBR’s forecasts, Hutton-Mills believed the UK will fall back into recession later this year and experience only a “shallow recovery” in 2024.

“Without a sharp fall in inflation, the ability of the Bank of England to provide monetary policy support during this downturn will be limited,” he told the CFO.

Investment allowance focus

According to the Centre for Policy Studies there is a ‘fundamental, evidence-based case for lower business taxes as a driver of growth and supporting business is vital to long-term growth.’

Its call on the UK government to soften the blow of higher corporation tax with investment allowances was noted during Hunt’s remarks.

In 2019, then chancellor – and now prime minister – Rishi Sunak introduced the ‘super deduction’; a measure which allowed companies to deduct up to 130% of the cost of qualifying expenditures from pre-tax profits.

Today, Hunt announced this measure will be replaced by “full capital expensing”, meaning every £1 invested by a company will be deducted from their profits. The government claims this is equivalent of a corporation tax cut worth an average of £9 billion a year for the three years. The measure is expected to increase business investment by 3% (OBR forecast).

Hunt also confirmed that the Alternative Investment Allowance (AIA) will remain at £1 million as of April this year instead of reverting back to £200,000 as expected.

Innovative and creative industry support

The UK government also wants to make taxes more competitive for the UK’s life science and creative industry sectors and announced a £1.8 billion support package.

It will enhance credit for science companies spending 40% or more of their total expenditure on R&D and will also introduce an expenditure credit for the film and television industries.

Hunt pointed out he was committed to supporting innovative tech companies, and cited the deal brokered by Sunak, himself and the BoE to sell the UK subsidiary of Silicon Valley Bank to HSBC as an example.

“Although the UK economy has shown signs of rebounding, it is imperative that the government continues to prioritise the tech sector. Sustained investment and attention are needed to maintain Britain’s status as a leading country for tech innovation and growth,” says Claire Trachet, CEO of business advisory firm Trachet.

“With technology solving significant problems and investor interest growing, now is the time to be competitive and create incentives that will incite investment into the UK tech sector – something the chancellor’s spring statement has successfully addressed.”

Investment zones

As part of its industrial strategy, the government also announced plans to set up 12 new ‘investment zones’ in England and, at least, one each in Scotland, Wales and Northern Ireland, which will represent partnerships between the government and local universities.

Each zone will be  provided with £80 million of support over five years where eligibility criteria is met.

“There were positives: there were boosts for AI companies and the tax cuts for R&D and those investing in IT and machinery in the UK are to be welcomed,” said Ritam Gandhi, founder and director of software company Studio Graphene.

“The investment zones sound promising, but exactly how and where the £80 million of funding will be spent in those 12 hubs remains to be seen.”

Gandhi also notes some of the most common challenges UK tech businesses face were not “adequately addressed” – namely, accessibility of funding for scaling businesses, which has been “kicked down the road” to later this year.

Dealing with labour shortages

For the many businesses that are struggling with staff shortages, the Chancellor announced a series of measures to encourage older people, parents held back by child caring responsibilities, and those not working due to sickness and disability back into the workforce.

Among them were disability benefit reforms and measures designed to help disabled and sick people find jobs. In addition, Hunt announced sanctions on Universal Credit claimants who are fit for work to encourage them back into employment.

Hunt also focused on the “economically inactive”, pointing out that there are currently about 3.5 million people aged over 50 who are not part of the labour force. They will be provided with apprenticeships to encourage help them back to work.

There are currently over one million job vacancies in the UK.

Within his remarks, Hunt also announced an increase to the annual pensions tax free allowance from £40,000 to £60,000 and abolished the lifetime £1 million pension tax-free allowance altogether in a move designed to appeal to those discouraged from working by the existing pensions tax regime.

A big move came with new measures to get parents back to work by offering more affordable childcare – including the extension of free childcare to parents of 1-2 year olds, and more support to Universal Credit claimants who cannot afford childcare.

Help with energy costs

Hunt also announced the introduction of the new Energy Bills Discount Scheme (EBDS) from April 2023 to April 2024 for eligible businesses in Great Britain and Northern Ireland. This will replace the current Energy Bill Relief Scheme that supports both businesses and public sector organisations such as schools and hospitals.

The new scheme will mean all eligible UK businesses and other non-domestic energy users will receive a discount on high energy bills until March 31, 2024.






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