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Laying the foundations for growth – a review of the Chancellor’s 2023 Budget

Budget 2023

The Chancellor delivered his budget yesterday stating that we are on the right track with the UK economy delivering a budget for long term healthy growth prosperity with a purpose. The OBR forecast confirms that the UK will not now enter a technical recession in 2023 and shows that inflation will go down from 10.7% in 2022 to 2.9% by end of 2023.

Jeremy Hunt stated that he wants to further his objective for the UK to become the best place to do business and invest and based his strategy on three key areas: lower business taxes; reducing energy costs and supporting growth industries.

Will this be enough to restore confidence and put UK on the map as a global leader in science technology and innovation?

Here are some details of key measures set out today: 

Tax Reliefs and Allowances:

Capital Allowances: The Chancellor recognised that there was going to be a strong knock on effect of the corporation tax moving to 25% but stated that only 10% of companies will pay the full 25% rate. The annual investment allowance for small businesses will increase to £1m so that 99% of all businesses can deduct the full value of all their investment from that year’s taxable profits. Recognising that the Super Deduction relief was coming to an end, he announced instead a new policy of full expensing for the next three years, meaning that every £ a company invests in capital equipment, plant and machinery can be deducted in full from taxable profits and is based on a range of specified equipment. In addition, there is a three-year extension to the 50% first year allowance deducted from the cost of other plant and machinery during the year of purchase which came in alongside the super deduction rate. Jeremy Hunt claimed that the OBR had confirmed this approach would increase business investment by 3% for every year it is in place and that this new approach would mean that we had the most generous capital allowances regime of any advanced economy. However , the challenge for most businesses in terms of investment will be the constant changing tax environment and this latest plan only has a three-year horizon.

R&D Tax reliefs : New Research Intensive reliefs

The introduction of the new R&D tax regime announced in the Autumn essentially drastically cutting the level of relief that most small businesses can claim and introducing a single scheme is clearly going to have a huge impact from the 1st of April this year. However in his budget the chancellor announced that he wanted to specifically support smaller research-intensive companies so that qualifying small businesses that spend 40% or more of their total expenditure on R&D would be able to claim a credit worth £27 for every £100 they spend on R&D. Key sectors likely to benefit will be life sciences and pharmaceutical, AI, Machine learning and digital tech; new manufacturing etc. This was announced as a £1.8 billion package of support helping 20,000 cutting edge companies turning Britain into a science superpower.

NB The government’s consultation on merging the R&D Expenditure Credit (RDEC) and SME schemes closed on 13 March. The government is currently considering the responses and no decision has been made. The government intends to keep open the option of implementing a merged scheme from April 2024.

Creative Industries Tax reliefs: A further key sector singled out for support was the creative industries and specifically offering 34% expenditure credit for film high end television and video games and 39% for the animation and children’s TV sectors.

Full details of the Tax and Allowances announced are available here:

https://www.gov.uk/government/publications/spring-budget-2023-factsheet-cutting-simplifying-tax-for-businesses-to-invest-and-grow/spring-budget-2023-media-factsheet-cutting-simplifying-tax-for-businesses-to-invest-and-grow

Support for Innovation:

The Chancellor referenced the work that the they had done over the weekend to secure the sale of Silicon Valley bank to HSBC and rescue the tech sector. Focusing on the need for to attract more investment into high growth firms he referenced that he would be working towards his Autumn statement later this year to build a larger more diverse financing system which will include measures to unlock productive investment from defined contribution pension funds and other sources and to make the London Stock Exchange a more attractive place to list.

Following the recommendations of Sir Patrick Vallance who led the Pro-innovation Regulation of Technologies Review. The Chancellor confirmed that the government is taking forward all Sir Patrick’s recommendations on the regulation of emerging digital technologies, published alongside Spring Budget which include the following: 

Regulatory Reform for medicines and medical technologies. As a further boost to innovation and commercialisation of research, it was announced that the Medicines and Healthcare Regulatory Agency (MHRA) will move to a different model to allow rapid more automatic sign offs for new medicines and technologies already approved in other parts of the world and a much faster approval process for the most cutting edge medicines and devices, with an extra 10 million funding over the next two years to put in place a rapid regulatory approval process with the with stated aim to make the UK a more exciting place to invest in life sciences and healthcare.

AI and Digital technology the following measures would be put in place:

  • The launch of an AI sandbox to trial faster approaches to help innovators get cutting edge products to market
  • Provide clarity on IP rules for generative AI companies to access the material they need also looking at regulations around growth
  • £900 million to build an exascale supercomputer and to establish a new AI Research Resource to provide significant compute capacity to our AI community and provide scientists with access to cutting-edge computing power.
  • A new Strategy for Quantum would be launched this year creating a programme totalling £2.5 billion over the next 10 years, focusing on realising 4 goals: ensuring the UK is home to world-leading quantum science and engineering; supporting businesses through innovation funding opportunities and by providing access to world-leading R&D facilities; driving the use of quantum technologies in the UK; and creating a national and international regulatory framework.
  • A new annual £1m prize for ground breaking AI research was also announced.

Further measures in the detailed 2023 budget document that were not announced in the the Chancellor’s speech include:

  • Innovation Accelerators programme £100 million funding for projects to accelerate the growth of 3 high-potential innovation clusters. This includes the Manchester Turing Innovation Hub led by the University of Manchester, 2 quantum projects in Glasgow and health and medical technologies projects led by the University of Birmingham.
  • Web 3 or the Metaverse. The government will work to maximise the potential of Web3 and spur UK growth and innovation, alongside empowering individuals to influence how their data is used, and managing downside risks to privacy, security and harms.
  • British Patient Capital BPC: Building on British Patient Capital’s strong track record, the government will extend the programme a further 10 years until 2033-34 and increase its focus on R&D intensive industries. This will bring at least £3 billion government investment across key industries including life sciences, Net Zero and deep tech, crowding in many multiples more in private capital
  • Long Term Investment for Technology and Science (LIFTS) To support Defined Contribution (DC) scheme investment into innovative UK companies, the government will launch a Long-term Investment for Technology and Science (LIFTS) scheme, providing a key stimulus for industry to create the structures needed to mobilise DC scheme investment into our most cutting-edge companies. Today, the government is inviting feedback on the design of the competition.
  • Local Government Pensions: Leading by example by pursuing accelerated transfer of the £364 billion Local Government Pension Scheme assets into pools to support increased investment in innovative companies and other productive assets. The government will shortly come forward with a consultation.

Net Zero:

The Chancellor announced renewed efforts to encourage businesses to focus on energy reduction having appointed Dame Alison Rose from NatWest to Co-chair a new National Energy Efficiency Taskforce also continuing the £600m tax relief available for energy efficiency measures. Further funding is being provided to invest in carbon capture and low carbon technologies amounting to £20bn over 20 years.

The Government is launching Great British Nuclear (GBN) to address constraints in the nuclear market and support new nuclear builds as the government works towards net zero. GBN will launch the first staged competition for Small Modular Reactors .

In addition to the measures in the Spring Budget, the government will set out further action later this month to ensure energy security in the UK and meet our net zero commitments.

Levelling Up:

Investment Zones:

The Chancellor announced 12 new investment zones to be established supported by an £80m package of support. Areas that can bid to have one of these zones referred to by the Chancellor as “new Canary wharfs” would be: the West Midlands ,Greater Manchester ,the North East ,South Yorkshire, West Yorkshire, E Midlands, Teesside and Liverpool, as well as one each for Scotland Wales and Northern Ireland. The core criteria for a successful bid would be a bold and imaginative partnership between local government ,university or Research Institute as a means to catalyse innovation clusters offering tax reliefs and other incentives. We hope that these new zones will seek to use their new funding and power to build and grow an effective investment ecosystem to build and grow innovative small businesses including building their angel and early-stage investment capacity.

A further measure was to give deeper powers to more local leaders. Trailblazer deals have been agreed with the Greater Manchester and West Midlands Combined Authorities which will give them greater control over local services and policy and also negotiate a new wave of devolution deals with areas across England. New Levelling Up Partnerships, providing over £400 million of investment in 20 areas across England and over £200 million for 16 high quality regeneration project were also announced. 

Employment and Talent:

In terms of employment and talent the focus was on bringing many more people back into the workforce with specific policies for disabled people and also older workers announcing a new scheme for “Returnships” sitting alongside the Apprenticeships model.

Pensions reform: The pensions annual tax free allowance is to be increased by 50% and the lifetime allowance cap is to be abolished offers an incentive to people to stay in work for longer – but also may provide a potential opportunity for more people to have the capacity to invest in small businesses.

Reforms of childcare: which have been already announced will increase the supply and range of support but most importantly opening this up to children from 9 months old to five years to be brought in over the next two to three years offering access to 30 hours free childcare per week. This will not only support the supply of skills and talent but will support many more women to consider setting up and building a business.

The Chancellor is making a start on a plan for growth and underlining the Government’s support for innovation and key sectors. Will this be enough to boost business investment and productivity? Are these the right measures to achieve the ambition to be a global leader in science, technology and innovation? We welcome the thoughts and comments of our community.

By UKBAA 16 Mar 2023