A year ahead for SMEs: Tax Guide

Without a doubt, last year has been bumpy for many SMEs. Various changes in tax rates and thresholds on top of post-Covid challenges, political instability, and rising prices have kept many business owners on their toes. We also received some big news regarding the landscape this year. 

So how does 2023 look from a tax and business perspective, and what do founders need to keep in mind? Below you can find various announcements and reversals in several key areas.

Tax rates

This year SMEs and their owners have had to keep on top of various changes in tax rates. 

The corporation tax rate will increase to 25% with effect from 1 April 2023. The increase was cancelled in September and reversed again by Jemery Hunt in November 2022.

Various changes were also made to the rates that might apply when profits are extracted from SMEs. 

The rates of income tax on dividends and national insurance contributions were increased by 1.25% with effect from 6 April 2022. The NIC increases were reversed with effect from 6 November, creating composite rates for those that charged annually, such as class 1A and class 4 contributions. 

It was expected that the increase on income tax on dividends will be reversed from 6 April 2023. However, it’s not the case. In addition, the dividend allowance is to fall to £1,000 in 2023/24, and then to £500 in 2024/25.

Another good piece of news is the additional rate threshold from £150,000 to £125,140 from 2023/24 for the income tax.

Investment in SMEs

The SEIS was introduced in 2012 to provide generous tax incentives for those investing in relatively small and new trading companies. It was announced that various limits under the scheme will all be increased. That includes the amount that can be invested, the size of the company and the age of the company.

More information regarding SEIS/EIS changes can be found in our previous blog.

The capital allowances 

The capital allowances super-deduction, which was announced at the time of the increase in the corporation tax rate with effect from 1 April 2023, was due to fall away from 31 March 2023. In addition, the annual investment allowance was due to revert to its permanent level of £200,000. 

However, the government decided to increase the permanent level of the annual investment allowance to £1m. This level should be sufficient to cover the qualifying expenditure.

R&D Tax Credits

SMEs that undertake qualifying R&D activities make tax relief claims under the R&D Tax Credits scheme. Based on HMRC review, the scheme has been exploited, and new proposals were announced to fight this issue. From 1 April 2023, many changes will come into play regarding this scheme, which include:

• The rate of the enhanced deduction will fall from 130% to 86%, while the rate of the repayable credit will fall from 14.5% to 10%. 
• New restriction on the ability to claim relief in respect of certain expenditure which relates to non-UK activity.
• Introduction of various additional compliance obligations (although some companies will benefit from the categories of qualifying R&D expenditure being expanded to encompass data and cloud computing costs.

Administration

The government continued to progress its MTD programme. In 2022, all VAT-registered businesses (including those registered voluntarily) came within MTD for VAT, and the government has now removed the ability of businesses to file VAT returns through their VAT online account.

MTD for ITSA is the next step, and this is due to begin to be introduced from 2024. A draft notice were published on 1 July and providing some clarity on the operation of the regime, although many unanswered questions remain.