Spring budget 2023 overview: how does it impact your business?

Despite intense pressure to cut taxes in his first spring budget, chancellor Jeremy Hunt resisted.

While he presented a fiscal plan that promised to stimulate growth, as we look at the detailed proposals, it’s clear some of his announcements aren’t quite as generous as they first appear and will have limited impact on most legal firms.

As anticipated, there were few announcements on tax beyond those made in the autumn statement.

There were no real surprises aside from the abolition of the lifetime pension allowance, which exceeded our expectation of an increase in the allowance.

Jeremy Hunt described his budget as one for growth based on the four pillars of the UK government’s industrial strategy: enterprise, employment, education and everywhere.

The government wants to halve inflation, reduce public debt and get more people into work and back to work to boost economic growth.

With the Office for Budget Responsibility (OBR) reporting inflation will fall from the current 10.1% to 2.9% by the end of 2023, and with borrowing costs and energy prices lower than previously expected, it is now predicted the UK won’t enter a recession this year.

Growth or contraction?

The chancellor promised to restore credibility to the UK’s finances, yet he faces an economy that is languishing.

Despite confidently suggesting that we are outperforming, that is unfortunately not the case. The chancellor was keen to highlight growth, but a 0.2% contraction is still predicted for the year.

While the economic situation is now improved relative to forecasts from just a few months ago, the UK economy remains subdued and is forecast to lag its international peers.

Markets’ reaction

For the markets, it was not going to be a budget where the government would take big bold moves.

We knew that the government would not announce anything that would risk challenging stability, and so it was no surprise there was little in it from a markets’ perspective.

The chancellor was mindful of the chaos created by Kwasi Kwarteng’s mini-budget of last autumn and, while markets have fallen, this is linked to negative developments in the banking sector, not Jeremy Hunt’s announcements from the dispatch box.

Business taxation

The chancellor said he wants the UK to have the “most pro-business, pro-enterprise tax regime anywhere” and introduced enterprise measures which he said would lower business tax.

It was confirmed corporation tax rates will increase from April 2023 as planned, despite calls for these to be scrapped.

The chancellor stated only 10% of companies would pay the headline 25% rate and that at 19% “our corporation tax rate did not incentivise investment as effectively as countries with higher headline rates”.

On a more positive note, to replace the super deduction which ends on 31 March 2023, companies will be able to claim 100% relief on qualifying capital expenditure (such as IT equipment and plant and machinery) without any cap for the next three years.

However, for virtually all legal firms, the £1 million annual investment allowance provides this relief already.

Full expensing only applies to incorporated businesses, so partnerships and unincorporated businesses won’t benefit.

While the relief is more generous than we had expected, it is unlikely to have a significant impact on law firms.

Research and development (R&D) expenditure

It was announced that there will be an increase in the R&D tax credit that can be claimed by qualifying SME companies who “will receive £27 from HMRC for every £100 of R&D investment”. This refers to the repayable credit where the company is loss-making.

To qualify, the company must incur at least 40% of its total expenditure on qualifying R&D activities, which is a relatively high threshold.

This could encourage businesses to artificially inflate their claims to benefit and goes against the government’s commitment to target spurious R&D claims.

While the chancellor positioned this as a significant benefit and incentive to drive innovation, when we have considered the detailed proposals compared to the SME R&D scheme in its current form, the new rules are not as beneficial and unlikely to be of major benefit to the legal sector.

Getting more people into work

While the chancellor was expected to raise the pension lifetime allowance (LTA), currently £1,073,100, up to £1.8m, closer to its previous peak, instead he abolished it.

The government will remove the lifetime allowance charge from 6 April 2023, before fully abolishing the lifetime allowance in a future Finance Bill.

The annual pension allowance will be increased from £40,000 to £60,000 from April 2023.

Individuals will continue to be able to carry forward unused annual allowances from the three previous tax years. This will make pensions a much more attractive investment/retirement vehicle.

However, Keir Starmer has already pledged to reverse the scrapping of the LTA, except for targeted measures for the NHS, should a Labour government be elected.

The chancellor also announced an expansion of the 30 hours of free (term-time only) childcare to children from the age of nine months, although this will not begin to apply until April 2024 and is subject to staged implementation.

Further reforms to get more people into work were also announced, supporting those on benefits, older workers and those will health conditions.

What does it mean for my business?

Whilst there were few announcements that will directly impact law firms, measures to retain people within the workforce may help some businesses.

The changes around pension, childcare and the new voluntary employment system, Universal Support, have been brought in with the intention of boosting the size of the UK labour market. 

The current low rate of labour force participation in the UK is having an adverse impact on economic growth.  

Time will tell whether the changes will work as intended, or whether alternative measures would have been more effective. 

Whilst there were few announcements that will directly impact law firms, measures to retain people within the workforce may help some businesses.