The Budget of 3 March carried a headline catching increase in Corporation Tax (the first since 1974) to a rate of 25% from April 2023. However, underneath the surface are potentially wider issues for insurtech businesses.
Focussing solely on the increase in the headline rate masks what becomes a more complex system for Corporation Tax for small and growing businesses. The 25% rate only kicks in fully for companies with taxable profits over £250,000, and the current 19% rate remains relevant for profits up to £50,000. Between those two thresholds, profits will be taxed at a marginal rate, of 26.5% to bridge the gap between the two.
Two relieving measures to assist companies in the period up to the rate increase were also announced, but it is unlikely that insurtechs will for the most part benefit significantly from these.
The first is a temporary change to the loss rules that will allow losses up to £2m to be carried back against profits to relieve Corporation Tax in the prior three periods, rather than one. Many growing businesses will have not yet built up the profit capacity to use against losses. Even if such profits did arise, careful consideration will be required, as the relief obtained will be at the previous rate of Corporation Tax (19%). Making a carry back claim for cashflow purposes (where possible) will therefore deny the use of losses in the future when the rate of tax (and therefore relief) will be higher.
The second measure is the introduction of a ’Super Deduction’ at a rate of 130% for expenditure on plant and machinery until 31 March 2023. The potentially significant benefit to manufacturing businesses is obvious. As insurtech businesses typically ‘run light’ on capex, the benefits to them are likely to be marginal.
Research and Development (R&D)
There were no specific announcements in respect of R&D, but the response from a recent consultation was published and a further consultation launched on Budget Day.
The previous consultation concerned qualifying costs for R&D purposes, including the cost of data cloud computing services – both areas that do not qualify for relief at present. The government has acknowledged that there is a strong case for bringing these costs into the R&D regime to increase available relief, but that this needs to be considered alongside other policy objectives before changes are made.
The new consultation concerns a review of the R&D regime more generally, including the definition of R&D, eligibility and scope of the reliefs, and ensuring that R&D relief is correctly targeted to maximise value for the economy. There is also the question as to whether R&D should be administered separately from the Corporation Tax system.
This should send positive signals to the insurtech community. R&D reliefs were first introduced (and R&D defined for tax purposes) in 2004. Since then the nature of the economy and growth areas have changed significantly, and the technology sector, including insurtech and fintech, has since become key to the UKs economic future. We would hope that any future tax changes will drive significant benefits to the sector.
Investment and Share Incentives
A call for evidence was launched on Budget Day, regarding how effectively Enterprise Management Incentives (EMIs) operate, and whether the scope for relief should be expanded. There is a spotlight on high growth companies who exceed the threshold limits for the scheme such as the Gross Assets limit of £30m. This could be a gamechanger for MGAs who carry client money balances, which can distort their balance sheet and mean that they drop out of the qualification criteria much sooner than non-regulated businesses of a similar scale.
It was disappointing that the third key area of relief for growth businesses, the Enterprise Investment Scheme (EIS)– which gives tax relief for investors in qualifying businesses – was not addressed on Budget Day. However, Tax Day – 23 March is likely to see the launch of further consultations, and we would hope that, as with EMIs, consideration is given to refining the EIS regime to make it operate more effectively.
Capital Gains Tax (CGT)
Somewhat surprisingly given the attention given to CGT in recent months, and the expectation by many that significant changes would be announced, CGT received no mention in the Budget. Again, we have one eye on Tax Day as we expect the second report from the Office of Tax Simplification in this area.
The significant attention on this tax, not least in the media, will continue to leave business owners unsettled and uncertain as to whether changes are in the pipeline which could have a significant effect on plans for their business and retirement. For many, we expect that clarity and stability (even if a negative change is announced) would be preferable to the current situation.