The Spring Budget 2023 – a real estate perspective

Under the “Everywhere” pillar of the Chancellor’s four-pronged Budget, the delivery of 12 new investment zones across the UK was announced. As signalled in the Autumn Statement 2022 this was a reduction to the 40 or more zone previously announced.

Potential areas for such zones include the West Midlands, South and West Yorkshire, Teesside and Liverpool with at least one investment zone in Scotland, Wales and Northern Ireland. Each area will be invited to identify a location for a “bold and imaginative partnership” with a university/research institute within the locality. In England, areas which are ultimately selected will have access to £80m of support including enhanced capital allowance and structures and buildings allowance rates (although it is not clear how generous this will be in light of full expensing), relief from stamp duty land tax (SDLT), business rates and Employer National Insurance Contributions. In some cases, investment zones will also receive access to grant funding to improve local infrastructure. Applicants will need to show how their areas will support the UK in reaching its net zero target in 2050, protection of the natural environment and resilience to climate change.

Infrastructure projects have been hit by high inflation, particularly construction related, and construction prices have eaten into capital budgets forcing a hiatus for many. However, the Government has reiterated its pledge to deliver high-quality infrastructure as part of its overall growth strategy and the Budget commits it to £600bn public sector gross investment over the next five years (split across economic and social infrastructure) and the publication of an updated National Infrastructure and Construction Pipeline (late 2023). In terms of the local infrastructure required to "level-up" local communities and businesses the Government has also committed to an additional £200m for road network improvements and maintenance (i.e. potholes, bridges) in the next fiscal year. The Budget also includes reference to the "Action Plan" published by the Government which proposes reforms to the nationally significant infrastructure projects (NSIPs) planning process “supported by £15m funding over 2023-24.”

From a levelling-up standpoint, the Chancellor emphasised the importance of local leaders to economic growth. The Government will consult on transferring responsibilities to Local Authorities from April 2024 (which will result in Local Authorities retaining 100% of their business rates) and mayors will have greater financial autonomy to control investment in their areas. For example, they will have powers to determine the strategic direction of the Affordable Housing Programme in their areas.

The Chancellor also announced over £200m for local regeneration projects including Marsden (New Mills) and Tipton. A £400m fund to establish new levelling up partnerships was also announced. The intention is to bring “the collective power of government to provide bespoke place-based regeneration in 20 of England’s areas most in need of levelling-up over 2023 and 2024-25.” Areas identified as candidates for this include Blackburn, Mansfield, Middlesbrough and Hastings. A third round of the Levelling Up Fund will take place later in 2023.

The Chancellor singled-out the life sciences sector as requiring research and development (R&D) investment and support. The detail in the Budget also highlights the “supply of commercial development, in particular lab space” as being a key component in “supporting R&D needs and driving investment into high value industries across England.”

A high proportion of England’s life science space is already established in R&D hubs across the Oxford-Cambridge corridor. The improvement of transport links is considered essential to the further development of lab space and ancillary industry, such as manufacturing sectors, in this area. The Budget states that the Government “will confirm the route for the new Bedford-Cambridge [rail] section and will provide capacity funding to support local authorities to develop their plans for strategic economic growth around new stations.”

Support for further growth within the Oxford Cambridge arc is expected from Government and details have been promised “following the recent National Planning Policy Framework consultation.”

The Chancellor set out three measures under the “Enterprise” pillar including, reducing business taxes, lowering energy costs and supporting growth industries. Emphasis was placed on the need for a “competitive tax regime” and “to ensure tax competitiveness.”

In response to the fact that the corporation tax super-deduction will expire on 31 March 2023, and in order to offset the increase in the rate of corporation tax which is set to rise to 25% from 1 April 2023, the Government has introduced a number of measures to boost investment. Those measures include:

• "Full expensing" which will offer businesses a 100% first-year capital allowance on qualifying plant and machinery for a three-year period from 1 April 2023. Every pound invested in such plant and machinery can be deducted, in full, from taxable profits. This will include construction equipment (bulldozers and excavators), warehousing equipment, office equipment and certain fixtures such as fire alarm systems. This measure has been introduced following a consultation conducted by the Government in 2022 after which the Government identified full expensing as being the preferred option of the proposals set out in that consultation. Expenditure on plant or machinery for leasing is excluded from first-year capital allowances. The Government states that this is due to “longstanding concerns about abuse and wide scope for error” and has promised to “work with industry to identify possible policy solutions that appropriately mitigate these risks.”
• a 50% first-year allowance for qualifying special rate assets. This will also apply for a 3-year period.

These new measures are in addition to the annual investment allowance of £1m which was made permanent by the Chancellor last November and which allows most businesses to write off amounts up to the cap against taxable profits. There had been some concerns that an enhanced capital allowances scheme would prove too expensive for the Treasury and other savings would need to be made to avoid the cost of the current super deduction arrangements which have previously been described by the Chancellor as being “eye wateringly expensive.”

The planned six percentage point rise in corporation tax will still take effect from April 2023. This will result in a headline rate of 25% which, according to IFS figures, will take the UK above the OECD average for headline corporation tax rates, albeit as the Chancellor pointed out the lowest headline rate in G7. The temporary measures set out above are intended to mitigate the effect on business and the fears that the increase would adversely impact growth by offering what the Government has calculated as a “£27bn tax cut for business…which will drive investment” (the OBR anticipates 3% increase in business investment as a result and the intention is to make these measures “permanent when responsible to do so.”

The Budget sets out the amendments to the real estate investment trust (REIT) regime to “reduce administrative burdens for certain partnerships investing in REITs” which are intended to take effect from 1 April 2023 and which will have statutory footing once the Spring Finance Bill achieves Royal Assent. This, combined with recent reform to remove barriers to entry, are intended to increase the competitiveness of the REIT regime and to make it more accessible and attractive as an investment vehicle.

The Budget also sets out proposals for legislation to be made to broaden the qualifying asset holding companies (QAHC) regime (introduced in April 2022) to ensure that it is “more widely available to investment fund structures” in order to increase the UK’s draw “as a location for establishing asset holding Companies.”

The Treasury announced investment in carbon capture and storage projects, allocating up to £20bn of support for early development of carbon capture, utilisation and storage (CCUS) and the Chancellor identified the east coast, Merseyside and North Wales as being locations for such projects. This is to support what the Chancellor calls “an enterprise economy” and the Government’s drive towards net zero with the aim of storing 20 - 30 million tonnes of CO2 per annum. CCUS captures CO2 from fuelling of industrial and power-generation facilities.

Mr Hunt also championed the need to invest in domestic sources of energy to ensure cheap and reliable energy for the "enterprise economy". He identified increased nuclear capacity as vital for net-zero and, to encourage investment in nuclear sites and energy nuclear power will be classified in the green taxonomy (subject to consultation) as “environmentally sustainable.” This will facilitate access to the same investment incentives as are currently afforded to renewable energy. Further to the announcement in Autumn 2022 of the funding and development of Sizewell C, the Chancellor made two further announcements:

• the establishment of "GB Nuclear" which will “bring down costs and provide opportunities along the supply chain to provide one quarter of our electricity by 2050; and
• the launch of a competition, run by GB Nuclear, for small modular reactors which, if viable, will be co-funded by the Government. In the future, “further large Gigawatt-scale projects will also be considered.”

Energy remains a pinch point for development and, as such, these announcements will be of interest to developers. However, these measures may not resolve those energy demands in the longer term as demand continues to rise i.e. greater pressures may be exerted as the announced support for R&D and tech development comes to fruition.

The Budget includes provision for the reduction of charges for domestic UK Heat Network customers on non-domestic heating contracts. Entities which operate, are involved with the operation/ownership of district heating networks, or who operate or own developments which are supplied by district heat networks may be impacted by this (depending on the arrangements for recovery of costs and charges).

The Treasury has acknowledged the difficulties faced by housing developers seeking to deliver housing on protected sites with high levels of nutrient pollution. The Budget promises additional support to “address the pollution at source and to support housing developers to deliver their environmental obligations” by ensuring the delivery of ‘nutrient neutrality’ obligations. Funding will be made available for “locally led” nutrient mitigation schemes and there will be a call for evidence seeking information from local planning authorities (LPAs).

The Government has commissioned the Migratory Advisory Committee to undertake a rapid Shortage Occupation List (SOL) assessment for the construction and hospitality sectors ahead of the full review ending later this year. The government has added five construction occupations to the SOL which will take effect before summer recess.  This will hopefully ease some of the labour and skills shortages in the construction industry.

The Government also launched a raft of consultations yesterday. Those with the greatest potential relevance to the real estate sector include a technical consultation into business rates review which sets out how the Government intends to put into effect some of the outcomes of the most recent review; and a consultation into value added tax (VAT) energy saving materials relief.

The Government will also be publishing the following:

• a summary of responses to the Business Rates Review technical consultation (closed in February 2022 addressing the Non-Domestic Rating reform package and its delivery;
• a Valuation Office Agency (VOA) business rates transparency and disclosure consultation;
• a summary of responses to its consultation on digitalising business rates;
• a consultation on measures to combat business rates avoidance and evasion;
• a consultation on the updated Energy National Policy Statement; and
• the final Water National Policy Statement.

There were also a number of potential announcements that were (to various degrees) anticipated but which did not materialise such as:

• changes to multiple dwellings relief and mixed use SDLT rules to reduce the scenarios in which transactions will qualify for either relief;
• additional incentives for freeports, to capitalise on attracting investment; and
• investment in enforcement action (i.e. penalties) against overseas entities that own property in the UK which have failed to comply with requirements to register with Companies House on the Register of Overseas Entities.

In addition, the Budget did not address some of the areas that real estate industry players had advocated for, such as:

• zero rating of VAT on repairs and maintenance to encourage investment in greening property stock and incentives (i.e. changes to business rates) to increase the viability of investment in decarbonisation (although the Government has published a call for evidence on options to reform the VAT relief for the installation of energy saving materials in the UK);
• promotion of purpose-built student accommodation (PBSA) and build to rent (BTR) via carve-outs to the building safety levy and other targeted support for the professionally managed rental sector to ensure housing capacity and delivery;
• incentives to encourage town-centre regeneration through partnership with key stakeholders to attract / secure investment;
• using stamp duty to incentivise retrofitting and the introduction of a temporary concession to enable landlords to offset the cost of energy efficiency improvements needed to achieve an energy performance certificate (EPC) rating of C against tax; and
• a review of the current Local Housing Allowance (LHA) rates set by the VOA which are used to calculate housing benefit for tenants renting from private landlords.