UK Spring Statement 2022 - Considerations for Japanese groups operating in the UK

On 23 March, the United Kingdom (UK) Chancellor delivered his Spring Statement 2022. As expected, the Statement focused on measures to deal with the immediate cost-of-living pressures (including an immediate one-year cut in fuel duty and a rise in the National Insurance Contributions (NIC) starting threshold to match the income tax personal allowance from 6 July 2022). In addition, and as expected, the Statement confirmed that the NIC rise/ Health & Social Care Levy would be introduced as planned. Whilst the Statement primarily focused on easing the cost-of-living pressure on UK individuals the Chancellor did provide several indications of the direction of travel of longer-term plans which are expected to impact Japanese groups with UK operations.

Detail

Capital allowances

The Spring Statement provides illustrations of the types of changes that the Government could make to the capital allowances (tax depreciation) regime. The overall intention is to increase these deductions. It is possible that the Government may choose to make a combination of these changes.

• Increase the permanent level of the Annual Investment Allowance, a 100% in year allowance for qualifying capital expenditure, to £500,000.
• Increase Writing Down Allowances for main and special rate assets from their current levels of 18% and 6% to 20% and 8% respectively.
• Introduce a First Year Allowance for main and special rate assets where companies can deduct, indicatively, 40% and 13% in the year of expenditure, with the remaining expenditure written down at standard Writing Down Allowances.
• Introduce an Additional First Year Allowance, increasing the overall amount that can be claimed to greater than 100% of the initial cost, perhaps as an additional capital allowance of 20% in the first year, on top of standard Writing Down Allowances on 100% of the initial cost across the first and subsequent years.
• Introduce full expensing, to allow businesses to write off the costs of qualifying investment in one go.

The changes being considered relate to capital expenditure on general plant and machinery. However, the Government may consider changes to other allowances, such as the Structures and Buildings Allowance, or new reliefs targeted at specific investments (such as the current Enhanced Capital Allowances within designated Freeport areas). We should also note that there is currently a highly generous 130% allowance on plant and machinery expenditure prior to April 2023.

R&D tax relief

The Government has put forward three new announcements:

1. The intention to allow pure mathematics research to be within the scope of UK R&D relief.
2. As part of its commitment to include data and cloud computing costs within UK R&D relief, to broaden the scope to include all cloud storage.
3. The Government will continue with its proposal to focus support on innovation in the UK, however, exemptions for where it is unavoidable for the R&D activity to be undertaken overseas will be introduced. The Government will legislate so that expenditure on overseas R&D activities can still qualify where there are:

・Material factors such as geography, environment, population or other conditions that are not present in the UK and are required for the research, meaning expenditure must take place outside of the UK, for example deep ocean research.

・Regulatory or other legal requirements that activities must take place outside of the UK, for example clinical trials.

Details will be set out in draft legislation to be published in the summer prior to these measures coming into effect in April 2023.

The Government will consider further announcements in the Autumn Budget to ensure the UK’s R&D tax reliefs are as effective as possible and deliver the best possible value for taxpayers. This could include increasing the generosity of the R&D Expenditure Credit (RDEC), currently 13%, to boost R&D investment in the UK.

Income tax/ withholding tax

From April 2024 the basic rate of income tax will be cut from 20% to 19%. This will be implemented via a future Finance Bill, subject to the Chancellor’s fiscal principles being met. Changes to the basic rate also impact the rate of tax withheld on interest and royalties where no tax treaty relief applies and the rate of tax paid by overseas corporates subject to income tax.

Skills

The Government will consider whether further intervention is needed to encourage UK employers to offer the high-quality employee training. This will include examining whether the current tax system, including the operation of the Apprenticeship Levy, is doing enough to incentivize businesses to invest in the right kinds of training.

Green reliefs for business rates 

To support the decarbonization of non-domestic buildings, the Government is introducing targeted business rates exemptions in England for eligible plant and machinery used in onsite renewable energy generation and storage, and a 100% relief for eligible low-carbon heat networks with their own rates bill. The Spring Statement announced that these measures will take effect from April 2022, a year earlier than previously planned.

Next steps

The Spring Statement did not contain any fundamental changes to overall tax law. However, the announcement of a number of significant upcoming measures which aim to support the UK economy’s recovery following a turbulent period will need to be properly managed and planned for by Japanese groups operating in the UK. In particular, the combination of incentives available in the UK (such as a further increase in the scope of the UK’s R&D relief regimes and further enhancements to the UK’s capital allowance regime) coupled with the previously announce increase in the UK corporation tax rate to 25% from 1 April 2023 provide an opportunity for Japanese groups to consider their operating structure in Europe. EY’s UK Tax Desk Team based in Japan can help businesses understand and manage the impact that the recent changes may have on operations.