Tax Relief for expenditure on plant and machinery

The Annual Investment Allowance (AIA) is now permanently set at £1million. This means that businesses can claim tax relief at 100% on up to £1million of expenditure on qualifying plant and machinery (e.g. capital equipment).

‘Full expensing’ is an additional and alternative relief for companies only. It allows unlimited 100% upfront tax relief on qualifying plant and machinery that is purchased in a new condition on or after 1 April 2023. There is also an associated 50% allowance for expenditure on certain types of plant and machinery that does not qualify for the full 100% (including space and water heating systems, for example).

This ‘full expensing’ regime was initially introduced in Spring 2023 and had an original end date of 31 March 2026. It has now been announced that it will be made permanently available. Described as the ‘biggest business tax cut in modern British history’ it must be noted that it will usually only benefit companies or groups of companies that have already utilised their £1million AIA. It is not available at all for unincorporated businesses, although the expansion of the cash-basis (see below) achieves a very similar effect for sole traders and partnerships.

Full expensing does come with some quite complicated rules on the amount of upfront relief and the calculation of tax charges that may apply when the purchased plant and machinery is sold. Please talk to us for more details.

Making Tax Digital (MTD) for Income Tax

Under MTD for income tax, businesses will keep digital records and send a quarterly summary of their business income and expenses to HMRC using MTD-compatible software. These requirements will be phased in from April 2026, starting with sole traders and property landlords with gross income over £50,000.

In readiness, some ‘design changes’ to the scheme have now been announced to simplify and improve the system. These include:

  • Simplifying the requirements for providing quarterly updates by making them cumulative and adding functionality to amend or correct errors throughout the year;
  • Simplifying the rules for taxpayers with more complex affairs, such as landlords with jointly-owned property;
  • Removing the requirement to provide an End of Period Statement, with emphasis instead placed on a final declaration;
  • Exempting some taxpayers altogether, including foster carers and those without a National Insurance number; and
  • Enabling taxpayers using MTD to be represented by more than one tax agent.

There will also be new rules to ensure that taxpayers who volunteer to join MTD for income tax from April 2024 will be subject to the new, fairer points-based penalty regime for late filing of tax returns and late payment of tax, as already implemented for VAT. This approach assures the compliant majority that an occasional failure in the context of overall good compliance will not be treated in the same way as persistent poor compliance.

Business Rates

A new business rates support package worth £4.3 billion will be made available over the next five years to support small businesses and the high street. 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.

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, large retailers are expected to benefit from hundreds of millions of pounds of tax relief per year as a result of full expensing.

Getting Paid

One of the key challenges facing small businesses is the cash-flow implications of late payments, which hold them back from investing and innovating. The government plans to lead by example by 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.

Upskilling

Various initiatives are on the cards for business leaders to acquire the vital skills and opportunities they need to stay relevant, increase productivity and grow their businesses.

This includes a pledge that HMRC will rewrite its guidance on the tax deductibility of training costs for sole traders and the self-employed, to provide more clarity to business on what costs are deductible. This will ensure that individuals can be confident that updating existing skills, or maintaining pace with technological advances or changes in industry practices, are allowable costs for tax purposes.

Unincorporated businesses and their accounting year-ends

Unincorporated businesses that prepare annual accounts to a year-end date other than 31 March or 5 April will soon need to either change their accounting year-end or adopt a new process for how the profits or losses arising in their accounts are reported to HMRC.

At present, ‘basis period’ rules apply that broadly allow annual accounts that end during a tax year to act as the basis of profits or losses arising in that tax year.

A new system starts with transitional rules in 2023/24. From 2024/25, actual profits (or losses) arising in a tax year must be reported to HMRC by calculating and combining appropriate proportions of tax-adjusted profits (or losses) for the parts of each accounting period that overlap with a tax year.

Unfortunately, this will make it harder for some self-employed individuals to fulfil their tax compliance obligations and predict their income tax liabilities, but we will be on hand to help you.

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). The cash basis is currently an option for sole traders and partnerships if their annual business turnover is £150,000 or less.

In a significant shift from 6 April 2024, the cash basis will become the default accounting basis for all unincorporated businesses. The £150,000 turnover limit will be removed and some of the restrictions within the current regime that limit relief for interest deductions and loss relief will also be removed.

Businesses can ‘opt out’ of the cash basis and continue to prepare a balance sheet and use the ‘accruals basis’ if they wish. This will be an important choice, particularly in relation to business intelligence and management reporting, so please do talk to us about the options if this affects you.

Investment Zones and Freeports

Earlier this year, the government announced that it would establish 12 ‘Investment Zones’ across the UK. These Zones target tax and other incentives on high potential industry sectors to boost productivity and growth. A number of the Zones have now been announced and the Chancellor has now pledged to extend the program of funding and tax reliefs for these Zones from 5 to 10 years.

The tax incentives include relief from Stamp Duty Land Tax (SDLT), enhanced capital allowances for plant and machinery, enhanced structures and buildings allowances, business rates relief and reduced employer NICs on the earnings of eligible employees.

There has also been an associated extension to the window to claim Freeport tax reliefs in England; from 5 to 10 years, until September 2031. The tax benefits on offer in these port-based locations are similar to Investment Zones but also give extra VAT and Customs benefits.