Bloomberg Tax
March 9, 2023, 8:00 AM

The UK Spring Budget—a Clear Vision for Growth is Needed

Jane Mackay
Jane Mackay

Chancellor Jeremy Hunt’s next statement on UK tax and spending, otherwise known as the Spring Budget, will be delivered on March 15. This budget statement needs to provide a clearer vision than Hunt has given so far of how economic growth can be achieved through the UK’s tax system.

Former Prime Minister Liz Truss had promised growth delivered through low taxes and low regulation. The economic mayhem that followed then Chancellor Kwasi Kwarteng’s mini-budget on Sept. 23, 2022, feels like it was a long time ago.

This was the context in which Hunt delivered a calm, assured, if slightly bland Autumn Statement in November 2022. This statement delivered what was needed at the time— confidence in the UK’s economic management, stability for the markets—and it skillfully kicked the can of many tax increases to after the date of a next general election.

Since then, the UK economy has continued to be buffeted by a cost-of-living crisis, high energy prices, inflation, and strikes. More than calm assurance may be required now from the chancellor if he is to deliver the economic growth that will shift the economic outlook for so many.

Going for Growth

Hunt has promised “enterprise, education, employment, everywhere.” With leader of the opposition Keir Starmer now adopting economic growth as one of his “five priorities,” and economic growth being the desired outcome that is generally agreed across the political divide, what are Hunt’s options to differentiate, and what is he likely to announce?

No doubt we’ll hear about the UK’s response to US President Joe Biden’s $400 billion green investment plan. The fear will be that investment and talent will follow the money by migrating to the US to pursue scientific advancements and profits in this important sector. One way to respond in fiscal terms would be to make sure the UK can attract overseas investment here instead.

George Osborne sought to do this in 2016, when he was chancellor, by reducing the UK corporation tax rate to below 15%, to give the UK the lowest corporation tax rate of any major economy. There seems very little chance that Hunt will bow to pressure from rank-and-file members of parliament to roll back on the planned increase in corporation tax for large companies to 25% from April 1. After seeing the rate expected from April 1 move from 19%, to 25%, to 19%, and back again to 25% in the course of a few months, it’s highly unlikely Hunt will go back on the position he took just five months ago.

In any case, the international tax mood on corporation tax rates has changed since 2016, and we’re expecting legislation to effect part of the Pillar Two implementation of a global minimum tax of 15% to be introduced in the Spring Finance Bill 2023.

Mobilizing Manufacturing

If the UK government is serious about the green economy, Hunt would have to announce commitments to major government funding of strategically important green investments such as electric car battery plants, but recent experience at the collapsed startup Britishvolt suggests there isn’t the appetite for that yet.

If the government isn’t ready to make major investments, it will have to rely on UK enterprises to make their own investments in growth, and UK manufacturing is critical in this respect . The recent reporting of a collapse in UK car manufacturing, with the lowest car production in 66 years, is just one example of a general difficulty in the UK manufacturing sector. With a corporate tax rate increase from April 1, supply issues, and massive energy costs, it will be even more important that there are sufficiently attractive tax incentives for UK businesses to invest in modernization, so they can drive productivity and growth.

To boost UK manufacturing, the chancellor could consider measures to encourage investment in high-tech manufacturing. One way to do this would be to extend the super deduction. Arguably he should have announced this in the 2022 Autumn Statement to help business better plan investments, but he may have wanted to keep something up his sleeve for Spring Budget 2023.

The super deduction was introduced in 2021 and is due to expire on March 31. The measure provides 130% tax relief for each £1 spent on qualifying plant and machinery including high-tech plant. Once the company tax rate is 25%, the super deduction would mean that for each qualifying £100 ($120) the additional benefit to the business could be £7.50.

Inspiring Innovation

Beyond capital expenditure reliefs, it will be important for the chancellor to set out his vision for UK innovation with clear statements about how the government intends to manage and direct subsidies and grants for research and development, including through R&D tax relief, as well as how it intends to develop a workforce with the technical capability that high-tech businesses demand. For high-tech manufacturing and high-tech businesses generally, the recent piecemeal announcements of reviews of, and changes to, the UK R&D tax reliefs have created uncertainty and complexity for taxpayers.

The UK tax authority, HM Revenue & Customs, issued a “One to Many” approach on R&D to 2,064 taxpayers at the end of January. This means that HMRC sends one standard message that isn’t an inquiry but is designed to prompt taxpayers to ensure compliance with tax rules.

There has been a lot of concern about R&D fraud, and of course we should all be in favor of encouraging tax compliant customer behavior. However, such HMRC campaigns can cause concern for otherwise compliant taxpayers. If the risk of making a claim is a time-consuming inquiry from HMRC, they may decide not to bother, thus losing the repayable credit that provides funding for further R&D activity.

HMRC Resourcing

Taxpayer satisfaction with HMRC services is at an all-time low, and HMRC employees are stretched. Therefore, if Hunt plans to announce any investment in HMRC, he would do well to focus on getting the nuts and bolts of customer support to business right before the nice-to-haves. The UK economy will be in real trouble unless HMRC has the resources to process value-added tax registrations in less time than at present. Longer term, HMRC aspires to modernize and digitize and will need the resources to do that well.

Looking Forward

Alternatively, Hunt may be hoping that he can avoid doing any of these things and that the combination of “fiscal drag” and the recently negotiated amendments to the Northern Ireland protocol will do his work for him. With most businesses now accustomed to the additional VAT and customs compliance required since Brexit, the new operation of the protocol feels like a step toward better opportunities for profitable trade with the UK’s largest economic neighbors.

The budget provides the chancellor with an important opportunity to set out his vision for a successful, green, and growing UK economy—but we should prepare for caution to reign supreme as Hunt may decide that calm, assured, and slightly bland is right for now.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jane Mackay is national head of tax and an experienced M&A tax adviser with Crowe.

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