Tax hikes for businesses– but Jeremy Hunt’s Budget does give SMEs reasons to be cheerful

Thrings Business growth 2023 budget response

Jeremy Hunt’s Budget raised Corporation Tax but there were reasons for SME owners to smile, says Ramona Derbyshire, head of the Thrings Business Growth Hub.

Chancellor of the Exchequer Jeremy Hunt unleashed a stinger for SMEs in his first Budget – an increase in the main rate of Corporation Tax, paid by businesses on taxable profits over £250,000, from 19% to 25%. Companies with profits between £50,000 and £250,000 will pay between 19% and 25%.

The hike, first mooted in 2021 by Rishi Sunak when he was Chancellor, has been a political hot potato. Liz Truss tried to scrap it in her ‘mini budget’ in September during her short-lived stint as Prime Minister, but today’s announcement confirms that Rishi will get his way.

Tax rises are always hard to take, but the Budget contained several other announcements that will soften the blow for businesses. So, here are six reasons for SMEs to be cheerful:

1. Better news on inflation and recession

There is still an uncertain economic landscape, but it looks as if the UK will avoid a dreaded recession – defined as two successive quarters of negative growth. That’s better news than many feared and a boost economically and psychologically for businesses, helping them face the challenges ahead with a level of optimism they may previously have lacked.

Expectations that inflation will drop from 10.7% in the final quarter of 2022 to 2.9% by the end of this year will also be welcomed as a possible the sign that the cost-of-living crisis will ease, enabling more positive trading conditions for businesses. However, low inflation can be linked with low earnings and tighter consumer spending, and the economy is still predicted to shrink by 0.2% this year, so we’re still not out of the woods yet.

2. A continued freeze on fuel duty

Most of us have suffered with horrifying prices at the pump, and a fuel duty freeze that has been in place since 2011 has not stopped those prices rocketing thanks to the war in Ukraine and other economic factors. So, while a commitment to continue to freeze fuel duty for a 13th consecutive year will be welcomed by businesses, especially those with large transport costs, it isn’t a game changer.

However, it is far more welcome than the alternative – at one point the Office for Budget Responsibility warned that a 23 per cent rise in fuel duty would be necessary, which would have

raised pump prices by 12p per later. Businesses will have been pleased to see the Chancellor steer clear of that.

3. More free childcare to get parents back to work

The cost of childcare is a very big deal for parents of young children and is believed to be a factor in the decisions of some parents – especially mothers – not to return to work after having children. Couple that with the problems many businesses are experiencing when it comes to recruitment, and you have a huge headache for employers with a direct impact on the bottom line.

Jeremy Hunt’s announcement of a major expansion of state-funded childcare should go some way to easing that problem. In a phased plan, up to 30 hours a week of free childcare will be available to households in England, and by the time the phasing is complete this will kick in when a child is just nine months old.

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It’s a huge benefit worth up to £6,500 a year for working families – and businesses should benefit from the increased spending power of parents with young children as well as being able to retain staff who may otherwise feel it’s not worth it to work. However, the plan won’t begin to roll out in April 2024, so the impact won’t be felt in the short term.

4. Incentives for investment, research and development

We’ve already talked about Corporation Tax – but there are significant incentives that ease the tax burden for businesses that invest. Among the measures in the Budget is an increase in the Small Business Investment Allowance to £1million. That means businesses can deduct the full value of any investment they have made from that year’s taxable profits, up to the value of £1million. That applies to all kinds of investment in machinery, IT, cars, fixtures and more. The Government says 99% of businesses will benefit.

Also available for many SMEs is a credit worth £27 for every £100 they spend if they spend more than 40% of their total expenditure on Research and Development. Both these measures could significantly reward businesses that are prepared to invest in their own success.

5. Commitment to low carbon energy projects

Energy costs are a significant factor in the economic challenges facing businesses today.

The existing Climate Change Agreement scheme, which allows some businesses to claim tax relief on energy efficiency measures, is to be extended for two years, but the Chancellor acknowledged that ‘the long-term solution is not subsidy, but security’.

To support that the Government has pledged to invest in domestic sources of renewable energy, allocating up to £20billion in support for ‘Carbon Capture Usage and Storage’ schemes alongside wind and solar energy projects. However, the decision to effectively categorise nuclear projects as ‘environmentally sustainable’ may prove controversial.

The intention is to secure more energy creation domestically, so UK prices are not at the whim of the international markets. If successful, this could result on lower energy bills for SMEs, although results are unlikely to be felt in the short term.

6. Investment in AI and future technologies

Artificial Intelligence is the fast-moving technology of the moment, and following recent breakthroughs such as ChatGPT, it is seen as the future of computing. The Government wants to harness the huge potential of AI for business and the opportunities in the development of the technology itself in line with its ambitions to make the UK a worldwide leader in tech.

More streamlined Intellectual Property Rules and a new £1million annual prize for AI research are designed to encourage innovators to grasp this opportunity. It is perhaps an example of the Government jumping upon current trends, but tech businesses will hope that the commitment is genuine, and that the UK can steal a march on international rivals in bringing tomorrow’s computing technology to profitable use.

Ramona Derbyshire leads the Thrings Business Growth which offers specialist legal expertise enabling growth and success for entrepreneurs, families and businesses.

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