The 2023 Spring Budget: Impact on UK Small Businesses and the Corporation Tax Increase

By Graham | April 30, 2023

In the 2023 Spring Budget, Chancellor of the Exchequer Jeremy Hunt confirmed a sharp increase in corporation tax, from 19% to 25%. Despite being the most substantial hike in nearly 50 years, Hunt reaffirmed that the UK would still have the lowest headline rate of corporate tax in the G7.

However, the increase in corporation tax has sparked concerns among small business owners. Finbri surveyed 843 UK business owners, with three-quarters (74.73%) expressing strong concern about the tax increase. Additionally, with the introduction of the ‘full capital expensing’ policy, there are doubts about its effectiveness for small businesses.

Table of Contents

What is corporation tax and the current situation?

Corporation tax is the primary tax businesses pay on their profits and gains from selling assets such as shares, property, or land that have appreciated in value. Previously, businesses paid a 19% tax on profits over £250,000.

Changes taking place in April 2023 From 1 April 2023, the main corporation tax rate will rise to 25%. For businesses with profits under £50,000, the Small Profits Rate (SPR) will remain at 19%. Additionally, a new method of marginal relief will determine the marginal corporation tax rate for companies with profits between £50,000 and £250,000. The government has released a Marginal Relief calculator to help businesses check their eligibility.

Full capital expensing will replace the annual investment allowance, offering a 100% first-year allowance that enables businesses to deduct qualifying expenses from taxable earnings in the year the expenses are incurred.

Impact and Reaction of business owners

The corporation tax increase will likely result in decreased profitability, reduced competitiveness, a decline in research and development investment, and reductions in employment and capital expenditure. Business owners hope for a more supportive approach from the government to navigate the upcoming changes.

The full capital expensing policy and its implications Hunt anticipates that just 10% of companies will pay the full rate under his proposed strategy. He also introduced the ‘full capital expensing’ policy, which allows businesses to deduct plant and machinery investment costs from profits. The policy is expected to generate £9 billion in corporate savings. However, these savings are likely for companies already investing more than £1 million in plant and machinery, which most small businesses cannot afford.

The policy will only benefit larger corporations, as it effectively removes the £1 million cap while introducing a corporation tax increase for many smaller businesses. Small businesses may struggle to adjust to the policy changes with no permanent relief mentioned.

Concerns surrounding the economy and inflation

Finbri’s survey suggests that most UK businesses feel the effects of increased inflation rates and economic uncertainty. The corporation tax increase announcement has intensified concerns about the long-term impact on businesses.

Final thoughts

The decision to raise corporation tax from 19% to 25% in 2023 is worrisome for small businesses. Although the ‘full capital expensing’ policy has been introduced, it’s unlikely to provide significant relief to small businesses, who cannot invest £1 million in plant and machinery. This will leave many small businesses unable to benefit from the new policy and instead bear the brunt of the tax increase.

The government must do more to support small businesses, providing targeted assistance and fostering an environment encouraging investment and economic growth. Raising corporation tax is likely to achieve the opposite, hindering the growth and success of small to medium-sized businesses in the UK.