What's in the Spring Budget for startups?

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  1. Spring Budget takeaways
  2. R&D Tax Credit changes
  3. Corporation tax changes
  4. New capital allowances

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Spring Budget takeaways for startups, at a glance 

If you didn’t tune into the Chancellor’s Spring Budget 2023 address, we don’t blame you!

But we did, and we’ve got you covered. This article covers the key Spring Budget takeaways that we’re talking about with startups and scale ups. 

Here they are at a glance:

  • Changes to the R&D Tax Credit scheme 
  • Corporation tax rate changes
  • Two new capital allowances 

We unpack each of these for you below.

R&D Tax Credit changes 

The R&D Tax Credit scheme is a government incentive designed to encourage UK businesses to invest in innovation. 

If you qualify for the scheme, you can claim the credits as cash or use them to reduce your tax bill. How much you can claim depends on the size of your company and your level of R&D expenditure.

In November 2022, the government proposed significant changes to the scheme, which caused concern among the tech community. 

But in the Spring 2023 Budget, those concerns were alleviated somewhat with changes, including:

  1. R&D-intensive companies, with at least 40% of qualifying R&D expenditure out of total expenditure, will be able to claim a tax credit equivalent of 27%
  2. The previously proposed change to claiming R&D expenditure on overseas contractors has been delayed from 1 April 2023 to 1 April 2024

These changes might not go as far as we’d hoped, but they’re still a nice incentive to keep pushing the boundaries and investing in R&D. 

Of course, like anything involving tax, there are a few hoops to jump through to make sure you’re eligible for R&D Tax Credits. That includes proving your project meets certain criteria, such as the level of technical uncertainty and the advancement of scientific or technological knowledge.

But don’t let that put you off – if you’re doing something innovative and exciting, R&D tax is worth looking into.

Corporation tax rates in the Spring Budget

The Spring Budget included a mixed-bag of changes to UK corporation tax rates. In summary:

The main corporation tax rate for companies with more than £250,000 in profits will increase from 19% to 25% for FY23 (financial year 2023).

A new small profits tax rate has been introduced – a welcome development for startups. The tax rate of 19% will apply to profits below £50,000, providing a tax break for early-stage businesses that are still growing their revenue streams.

Marginal tax relief provisions have been introduced – this means companies with profits between £50,000 and £250,000 will pay corporation tax between 19% and 25%, gradually increasing within that range as profits increase.

Our take on all this? While the main corporation tax rate is increasing, it’s still still lower than other countries like France and Germany (26.5% and 30% respectively). The US has a federal corporation tax rate of 21%, but state rates can vary between 0% and 12%. 

The small profits rate is good news for startups. And for context, the UK’s strong regulatory framework and access to funding make it an ideal location for startups to thrive.

Two new capital allowances

The Spring Budget introduced two new capital allowances that could enable your business to write off the cost of some capital spending against taxable profits, reducing your tax bill.

1. Full Expensing (FE) – allows 100% deductions of the cost of specific plant and machinery from profits before tax from 1 April 2023 to 31 March 2026. This includes various types of equipment, such as forklift trucks, computers and office furniture.

Example: Suppose your company invests £100,000 in new machinery that qualifies for FE. Your business can deduct the entire £100,000 from profits before tax in the first year. If your corporation tax rate is 19%, this would result in a tax saving of £19,000 (£100,000 * 19%).

2. 50% First-Year Allowance (FYA) – allows 50% deductions of the cost of other plant and machinery, known as special rate assets, from profits during the year of purchase. This includes long-life assets like solar panels and thermal building insulation. The FYA has been extended by three years, now running until 31 March 2026.

Example: Imagine your company invests £50,000 in solar panels that qualify for the 50% FYA. In the first year, your business can deduct £25,000 (50% of £50,000) from profits before tax. If your corporation tax rate is 19%, this would result in a tax saving of £4,750 (£25,000 * 19%).

Word to the wise: It’s never a good idea to spend on plant/equipment you don’t really need, just for the sake of claiming a tax deduction. It can also be tricky to balance the cashflow side of spending now to receive tax back in future. We’re here to help with tax advice if you need it. 

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As with all our articles, please don’t take this as personal tax, financial or other advice (you need to speak to us for that).

Image credits: Jan Krnc (top), ThisIsEngineering (R&D photo), Fauxels (team photo).

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