What does the Spring Budget 2023 mean for design?

Chancellor Jeremy Hunt has delivered the Spring Budget with a focus on growth underpinned by four E’s: “Enterprise, Employment, Education and Everywhere”.

He established the context for the Budget by speaking of the “brightened economic and fiscal outlook” of the independent Office for Budget Responsibility (OBR)’s new report. However, the OBR warns that households are still facing the largest fall in living standards on record over the next two years.

Particular opportunities for the design industry are investment in R&D and in areas outside of London and the Southeast, as well as support for people currently excluded from the workforce.

“Investment everywhere”

The Chancellor announced twelve new investment zones across England as well as “at least one” in each of Scotland, Wales and Northern Ireland.

Design Council CEO Minnie Moll and Creative UK CEO Caroline Norbury OBE both welcome the measures – particularly the required collaboration with a university or research institute – suggesting that the strength of UK-wide and localised design expertise can capitalise on these opportunities.

Moll highlights the Greater Manchester Combined Authorities’ “design-led approach to local economic regeneration”, while Norbury mentions the pre-existing “Creative Clusters Programme”.

Employment: “removing barriers that stop people working”

The Chancellor announced measures aimed at removing barriers to work – including increases in childcare provision.

These will take the form of increases in free early-years childcare staggered over the next couple of years, as well as full “wraparound” 8am-6pm school care by 2026. This will be of particular interest to women with children; as reported in a 2021 Department of Education survey, 45% of non-working mothers would prefer to return to work if they could arrange good quality childcare.

Design Business Association (DBA) CEO Deborah Dawton comments: “There is a well-documented lack of women in senior positions throughout the creative industries, especially in creative roles, so hopefully this will help to address that over the coming years”.

The Chancellor also wishes to increase the number of over 50s in work, having announced “skills bootcamps” and apprenticeships coined “returnerships” tailored to this demographic.

Disabled people and those with long-term health issues could be helped into the workforce thanks to the announced separation of benefit entitlement from ability to work, and a new voluntary scheme for disabled people called Universal Support that allocates £4000 per person to find employment and put support measures in place.

Further worker support includes a £3m pilot scheme to get people with special needs transition from education to work as well as the allocation of £400m for mental health and musculoskeletal support for people in-work.

While not sector-specific, these have potential to help increase the presence of underrepresented groups in the design industry.

There was no mention of public sector pay, a notable omission as the Budget coincided with the largest strike action in a decade of half a million British workers including teachers, university staff, civil servants and train drivers.

“Enterprise”

While enterprise was a focus of the budget Dawton notes that “the policy with the biggest impact on UK design businesses was out in the open long before today’s budget – the increase of corporation tax from 19% to 25%”.

Though “larger businesses making healthy profits” will be affected, the maintenance of 19% for those making profits of less than £50k “will come as some relief to the thousands of micro agencies in the UK”, she says.

Accountants Moore Kingston Smith’s tax partner Michelle Denny-West highlights that there is “very welcome news for owner-managed businesses in the design industry” in the announced raise in annual allowance for pension contributions from £40,000 to £60,000, as well as the abolition of the lifetime allowance from 6 April 2023.

“Those sitting on large pension pots will no longer face a significant tax charge”, she says, but adds that pensions tapering rules for high earners can still “severely restrict the amount which can be contributed to a pension” – although the limit for this category has increased from £240-250k.

Capital Allowances

The Chancellor announced that between 1 April 2023 and 31 March 2026, companies’ investments in plant and machinery will qualify for a 100% first-year allowance for main rate assets – known as “full expensing” – in order to encourage growth. Full expensing allows companies to write off the cost of investment against tax to encourage business investment.

But Denny-West warns that “full expensing is not quite as generous as it might initially seem.”

“For most, the current capital allowances regime achieves the same result by virtue of the Annual Investment Allowance (AIA) which gives 100% relief for expenditure on qualifying assets up to the annual limit, which will be more than sufficient for design businesses”, she says.

“Businesses should also be aware that the full expensing only applies to companies, and not sole trader or partnership businesses” – although AIA is available instead, she adds.

R&D benefits

R&D benefits were announced in the form of higher rates of relief for loss-making and R&D intensive SMEs from 1 April 2023, corresponding to £27 for every £100 of investment. To be eligible, 40% of a business’ total expenditure must be on qualifying R&D investment.

Denny-West contextualises these new benefits against previous reductions in R&D relief for SMEs in the Autumn Statement, but adds that the delay to overseas expenditure restrictions will “give companies more time to consider and implement changes to maximise available R&D relief”.

Moll says that 42% of designers are involved in R&D according to Design Council research.

While welcoming the measures she describes them as “a stopgap to wider reform”, adding, “we now need the government to upgrade our tax credit system so it works for the whole design economy – aligning the definition of R&D to OECD standards so that it includes a more expansive definition of design, and creating a green uplift for innovation that aims to create positive environmental outcomes”.

Denny-West also warns of limitations to the announced reliefs: “SMEs who do not meet HMRC’s definition of “R&D intensive” (the 40% test) or are not loss making will be disappointed the measure doesn’t go further”.

“It is worth remembering the credit will be paid in arrears”, she adds. “Eligible companies will still need to fund their R&D activities in advance of receiving the additional credit, as has previously been the case.”

Until legislation is in place to enable these claims, claimants are faced with two “unsatisfactory solutions” of delaying claims or initially claiming at the lower rate and submitting a revised claim later, Denny-West says.

“An innovation economy”

The Chancellor praised the creative industries as a driver of innovation. Particular mention was given to the film and TV industry, video games, animation and children’s TV, as well as theatres, orchestras and museums – which will receive expenditure credits to give them “even more momentum”, according to the Chancellor.

The Chancellor also highlighted Artificial Intelligence. He announced an “AI sandbox” to help get emergent ideas to market, clarification around IP rules to support companies working with generative AI and ten years of an annual £1 million prize for AI research. To power future AI, he pledged £900 million to develop an “exascale computer”.

Norbury welcomes the Chancellor’s acknowledgement of the creative industries as an “innovative, high growth industrial sector” and suggests that the Budget included measures that Creative UK has been calling for.  “As well as reiterating the commitment to existing creative industries tax reliefs, and increasing headline rates, the Chancellor has locked-in higher rates of relief for theatre, orchestras, museums and galleries for a further two years”.

However, she argues that “our country deserves even bigger ambition”, including a “well-funded mixed investment ecology”.

“Given the scale of economic and social benefits the Creative Industries generate, making impactful changes could see the sector generate an extra £28 billion for the UK economy by 2025.

Moll adds that the Budget was “quiet on climate change”.

“To transition our design economy to a sustainable operating model, and capitalise on the opportunities of net zero, more ambitious policy intervention is needed.

“From retrofitting buildings to developing infrastructure for electric transport, improving products’ energy efficiency, and driving a circular economy – design can catalyse the shift to a sustainable economy with the right policy support in place”.

Taxation remains static but falls out of line with inflation

No changes were announced for Income Tax and National Insurance, Dividend allowance or Capital Gains Tax – although previously announced measures such as the reduction in threshold for the additional rate of tax will come into effect in April 2023.

Planned reductions in capital gains limits proceed from 1 April, but no new changes have been announced. For many, this will prompt “a sigh of relief”, says Denny-West.

Business owners will still benefit from the value relief on the sale of a business (business asset disposal relief).

Design businesses should increase their fees to fund rising costs

However, due to “cost-of-living increases out-pacing the wage inflation” Denny-West says, “the tax thresholds remaining static pushes individuals into higher rates despite not seeing a wage increase in real terms”.

She comments that this will “increase the pressure on employers to increase wages on top of other cost pressures”.

Dawton suggests that fee increases should fund this: “We always remind DBA Members that when increasing salaries, they should also be increasing their fee rates in order to keep them aligned”.

What else?

• A £63 million fund for public leisure centres and pools, whose decline has been highlighted by a recent Twentieth Century Society campaign.
• Energy: £2,500 cap on household costs continues for three more months until prices are expected to fall. Pre-payment meters, often used by the poorest households will have their prices levelled with direct debit payments and their forced installation temporarily suspended.
• Defence £11 billion added to budget for next five years – nearly 2 ½ % of GDP by 2025, building on the military support already given to Ukraine. A new £30 million package for ex-servicemen and women.
• Draught beer relief raised by up to 11p
• Fuel duty to be frozen and the previous 5p cut maintained.

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