Chancellor Jeremy Hunt delivered an Autumn Statement intended to bring stability, protect growth in the economy and continue to fund public services. He has raised taxes largely by relying on threshold freezes and fiscal drag rather than headline rate increases. Investment in energy efficiency and independence, infrastructure and targeted support for businesses are intended to encourage medium term growth.
We have broken down announcements from the Autumn Statement into sections – you can find in depth analysis below, under the headings of Corporate Tax, Personal Tax, Indirect Tax, Employment Tax and other notable measures. Watch our Autumn Statement webinar where our tax experts analyse the Chancellor's announcement, and what this could mean for you and your business.
Jon Hickman - Tax Partner
Jon has many years of experience dealing with both OMB’s and large international business. If you have any questions or concerns about how the Autumn Statement impacts you or your business, please get in touch with Jon or our tax team who will be happy to help.
Autumn Statement Analysis
Responding to concern about significant abuse of the SME R&D regime and in order to increase the international competitiveness of UK businesses, the government is rebalancing the rate of R&D relief for SME and Large Companies (under the R&D Expenditure Credit Regime), as follows:
For expenditure on or after 1 April 2023:
The government will also consult on the design of a single R&D tax relief scheme and mechanisms to further support R&D intensive SMEs without increasing overall the £20bn allocated to supporting R&D in the UK.
In addition, as previously announced at Autumn Budget 2021, the R&D tax reliefs will be reformed by expanding qualifying expenditure to include data and cloud costs, refocusing support towards innovation in the UK, targeting abuse and improving compliance.
The measures announced follow from the introduction of the SME PAYE and NIC cap and prohibition of overseas R&D costs. While the changes will be welcomed by large companies, they represent yet another blow to SMEs undertaking genuine R&D for whom R&D tax credits represent a valuable source of funding.
The Chancellor outlined a number of changes to the Energy Profit Levy - increasing it to 35% from 1 January 2023 and extending its duration until 31 March 2028 while reducing allowance for the investment costs to 29%. He also announced the introduction of a separate levy for Electricity Generators.
The 25% windfall tax on energy companies was increased to 35%, though it remains a temporary measure.
To ensure that electricity generators also pay “their fair share towards strengthening public finances” a temporary, 45% levy on corporate electricity generators will be introduced from 1 January 2023. The levy will be extraordinary profits, defined as electricity sold at above £75MWh. The measure will run until 31 March 2028.
Combined with corporation tax, this brings the cumulative rate on earnings over £75Mwh to 70%.
Key points:
There will be a consultation period with relevant generators before draft legislation is published in mid-December.
The government confirmed its intention to implement the Pillar Two rules issued in draft on 20 July 2022 (see previous coverage here) in order to comply with the global minimum corporate tax rate of 15% proposed by the OECD.
The new rules will apply for accounting periods beginning on or after 31 December 2023. The implementation of the Pillar Two rules is intended to protect the UK tax base against aggressive tax planning and reinforce the competitiveness of the UK. The measure is anticipated to raise £2.3 billion a year by 2027- 2028.
From 1 April 2023, large multinational entities operating in the UK will be required to maintain a Master File and a Local File in a prescribed standardised format set out in the OECD Transfer Pricing Guidelines.
In the meantime, HMRC will continue to consider the merits of the introduction of a Summary Audit Trail requirement. A Summary Audit Trail would consist of a questionnaire covering the main steps undertaken in preparation of the Local File. It would constitute an additional compliance burden for businesses, on top of preparing and retaining a Master File and a Local File.
Read our previous coverage of the forthcoming changes here.
From April 2023, the rate of Diverted Profits Tax will increase from 25% to 31%, in order to retain a 6% differential above the main rate of Corporation Tax, and therefore ensure that it remains an effective deterrent against diverting profits out of the UK.
Following the decision to proceed with the Corporation Tax rate increase to 25% from April 2023, the changes to the Bank Corporation Tax Surcharge which are legislated to take effect from the same point will also go ahead. From April 2023, banks will therefore be charged an additional 3% rate on their profits above £100 million, which means they will continue to pay a higher combined rate of corporation tax than most other companies, and a higher rate than they did previously.
The government is consulting on its proposed reforms to audio-visual tax reliefs which represent five of the eight Creative Industry Tax Relief schemes currently in place. The government’s goal is “to ensure that they remain world-leading and continue to best serve the needs of creative companies”.
Key proposals under consultation include:
The consultation will close on 9 February 2023.
From 1 April 2023, rateable values of non domestic properties in England will be updated to reflect the property market at 1 April 2021. A set of reliefs including a freezing of business rates multipliers and percentage caps on annual increases in business rates will be introduced to mitigate the effect of the new valuations on ratepayers subject to substantial increases in bills.
The percentage increase in business rates bills as a result of the revaluation will also be subject to annual caps until 2025/2026 based on the rateable value:
Rateable Value | 2023/2024 | 2024/2025 | 2025/2026 |
|---|---|---|---|
£0 – £20,000/£28,000 in London | 5% | 10% | 25% |
£20,000/£28,000 - £100,000 | 15% | 25% | 40% |
£100,000 | 30% | 40% | 55% |
The proposed caps for 2024/2025 and 2025/2026 will be adjusted by the rate of inflationary increase to the business rate multipliers in due course.
Business rates reliefs for the retail, hospitality and leisure sectors introduced during the pandemic will be extended and increased by 25%.
Following consultation on prospective reforms to business rates, the Government has decided not to introduce an online sales tax.
The current tax-free Personal Allowance of £12,570 will be frozen until 2028 – a two year extension to the freeze which was previously expected to end in 2026. The higher rate tax threshold will also be frozen until 2028 – the 40% rate tax will be payable on all non-savings and savings income between £50,270 and £125,140.
The threshold for the highest rate of tax will fall from £150,000 to £125,140. The additional tax rate of 45% will be payable on all non-savings and savings income above £125,140, so any individual already paying the 45% rate in 2022/23 will face an income tax increase of at least £1,243 for 2023/24.
Individuals with income of more than £100,000 will continue to have their Personal Allowance tapered, with those on incomes of more than £125,140, not being entitled to any Personal Allowance.
These changes will not apply to Scottish Taxpayers (not capital Taxpayers), where the rate continues to be set independently by the Scottish Parliament – its Budget is due on 15 December 2022.
The Chancellor announced that the tax-free allowance for dividend income will be halved from 6 April 2023 and again from 6 April 2024. Shareholders will start to pay tax on dividend income in excess of £1,000 (previously £2,000) in 2023/24, and where it exceeds £500 in 2024/25.
The tax rate that will apply to dividend income will depend on an individual’s tax band, with the current rates continuing in future years at 8.75% for basic rates taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate.
The main NIC thresholds that apply to employees, employers and self-employed individuals will remain frozen until April 2028. The net effect of this will be to increase the amount of NIC that low earners pay over time, but freezing the Upper Earnings Limit at £50,270 will benefit those whose income is above this level or increases beyond it before 2028: the NIC rate drops from 12% to 2% over the Upper Earnings Limit.
The tax-free Capital Gains Annual Exemption will be reduced from £12,300 to £6,000 from 6 April 2023 and further reduced to £3,000 from 6 April 2024. However, despite speculation before the Autumn Statement, the rates of Capital Gains Tax payable on gains above the Annual Exemption amount remain unchanged at 10% to 28% (depending on the individual’s level of income and the type of asset sold). The CGT proceeds reporting limit will be fixed at £50,000.
Legislation is being introduced with immediate effect which may impact how dividend income and capitals gains from a non-UK close company are taxed if these shares were received as part of a share for-share transaction. The changes will affect individuals who hold more than 5% of shares and securities in a UK close company and exchange some or all of those securities for an equivalent holding in a non-UK company.
Broadly, a close company is under the control of five or fewer shareholders; or, any number of shareholders who are also directors of the company: the vast majority of typical family or owner-managed companies will be close companies for tax purposes.
If an individual falls within these rules, the legislation will deem the shares in the non-UK company to be located in the UK for both Capital Gains Tax and Income Tax purposes. This will prevent UK resident but non-UK domiciled individuals from accessing the remittance basis of taxation on any:
The measure will take effect for any share- for- share exchanges carried out on or after 17 November 2022, although the legislation will be introduced through the Spring Finance Bill 2023.
Inheritance tax is payable on any estate above £325,000 – the tax rate is currently 40%. There is also the ‘residence nil-rate band’, which increases the tax-free allowance to £500,000 when the family home is passed to children/grandchildren. Both of these thresholds have been frozen until 2028.
With the decline in the number of non-electric vehicles (EVs) being reported as company cars and a huge increase in the number of EVs being chosen as replacements, it is perhaps unsurprising that the Chancellor has chosen to revisit the tax generated from EV company cars. However, the Government still wishes to encourage the choice of an electric vehicle rather than traditionally fuelled cars to support 2026 emissions targets.
An EV is currently taxed as a benefit in kind (BIK) when made available for private use by an employer for an employee with a cash equivalent of 2% of the list price, and the government committed to retaining this rate until April 2025.
Nevertheless, in the Autumn Statement, it was announced that the BIK rate will increase to 3% for the 2025-26 tax year, 4% for 2026-27 and 5% for 2027-28. Similarly, all non EVs will also see the same 1% increase per annum over the same timescale.
This change has been anticipated by the Fleet industry and they, along with employers, will be pleased that we have certainty for next 4 years. Despite the increases announced, EVs are still a very attractive proposition for both employee and employer alike - especially when provided via salary sacrifice.
July’s increase in the workers NIC threshold from £9,880 to £12,570 (aligning it with the income tax personal allowance) and the reversal this month of the 1.25% NIC increase, due to the removal of the Health & Social Care Levy, provided welcome savings of £480 per annum on average.
Freezing the NIC thresholds for workers and employers alike comes as no surprise, but for employers this will represent a real-terms increase in their employment costs with the secondary threshold remaining at £9,100 until April 2028. The Employment Allowance remains at £5,000 per annum and the government estimates that this will mean 40% of employers will not be affected by the freezing of the thresholds.
Those employers who are affected by rising NIC costs will also have to cope with the increase in the National Living Wage to £10.42 per hour (representing an increase of a little over £1,600 per full time NLW employee per year) from April 2023. This will mean that it is more important than ever to ensure that employment spend is targeted where it is most effective, on the benefits most valued by employees.
Furthermore, employers need to ensure that they do not risk having to pay interest and penalties if they get their employment taxes wrong.
Prudent employers should review both the benefit package offered to employees and their compliance policies and procedures to ensure that they maximise the value of their employee spend.
The government has confirmed that the VAT registration threshold of £85,000 and deregistration threshold of £83,000 will be maintained at current levels until 31 March 2026 rather than 31 March 2024. These threshold have been unchanged since 1 April 2017.
This measure means that more businesses will fall within the VAT net and be net contributors. It remains the case that some businesses choose to limit growth to avoid the ‘cliff edge’ effect of exceeding the VAT threshold.
A longer-term solution may therefore be required after March 2026.
Import tariffs on over 100 goods will be suspended for two years from January 2023 with tariff savings of up to 18%. The measure is in response to requests from businesses and stakeholders to reduce costs in certain sectors. Treasury documents give examples such as aluminium frames used by bicycle manufacturers and ingredients used by food producers.
The reduction in the cost base will be welcomed by business. However, overseas suppliers, who are also suffering from the global economic slump, may seek to increase raw prices. Businesses importing affected products would be advised to carefully review trading terms with suppliers.
The government will publish a review of the Energy Bill Relief Scheme (EBRS) for businesses and other organisations by 31 December 2022, but it has made clear that any support offered beyond March 2023 will be at a much lower level. However, the Chancellor has announced an extension of the Energy Price Guarantee for households: it will now run throughout 2023/24.
The current scheme guarantees that a typical household’s energy costs will not exceed £2,500 for 2022/23. The scheme will operate in a similar way for all households in 2023/24 although the typical household will pay on average £3,000 for 2023/24 – amounting to a subsidy of around £500. For 2023/24, The government will also double the level of support for households that use fuels such as heating oil, LPG, coal or biomass to £200.
The government says it is changing the scheme in this way so that it can also provide more targeted support to the most “vulnerable” through a new set of direct Cost of Living Payments as well as full CPI increases to the State Pension and benefits in 2023/24.
For purchasers of residential property in England and Northern Ireland, the following measures on Stamp Duty will be made temporary, ending on 31 March 2025:
The 2023/24 annual chargeable amounts for ATED will be routinely increased by the September 2022 CPI increase figure of 10.1%, as follows:
Property value | Annual charge |
|---|---|
More than £500,000 up to £1 million | £4,150 |
More than £1 million up to £2 million | £8,450 |
More than £2 million up to £5 million | £28,650 |
More than £5 million up to £10 million | £67,050 |
More than £10 million up to £20 million | £134,550 |
More than £20 million | £269,450 |
The Chancellor announced a package of measures to tackle tax avoidance, evasion and wider non-compliance that is estimated to raise £1.7 billion over the next five years. The package includes a £79 million fund for additional staff to tackle more cases of serious tax fraud as well as wealthy taxpayers’ non-compliance. This investment is estimated to raise £725 million, and is in addition to the £292 million of additional funding announced at the 2021 Spending Statement.
HMRC challenges taxpayers’ liabilities through a series of campaigns and ‘nudge letters’. These focus on areas identified as being particularly at risk of fraud and error, and therefore most likely to generate significant additional revenues for the Exchequer.
As their name suggests, nudge letters are designed to prompt taxpayers to reconsider whether they need to pay more tax to HMRC. Usually, HMRC issues them when it has information that suggests tax returns are incomplete. This could be data from overseas tax authorities about people’s non-UK bank interest, or discrepancies between Companies House data and tax returns. Recent nudge letters include:
HMRC is also devoting resources to tackle fraudulent and erroneous R&D tax claims, undertaking detailed checks before paying out the claims, or investigating cases on which refunds were made where the claims appear excessive. These compliance checks are undertaken by HMRC’s Fraud Investigations Service and its new R&D Anti-Abuse Unit, amongst others.
Any taxpayers who receive these nudge letters or face an R&D investigation should seek specialist advice on how best to respond. How many years’ tax HMRC can collect or reclaim depends on why mistakes occurred. This also affects the levels of any tax-geared penalties.
Read more at:
Voluntary Disclosures | Worldwide Disclosure Facility | Tax Dispute Resolution - BDO
The Investment Zones programme will be refocused on a limited number of the highest potential knowledge-intensive growth clusters, leveraging local research strengths. The policy will be centred on universities in “left-behind” areas to help build clusters for new growth industries.
The Department for Levelling Up, Housing and Communities will work closely with mayors, devolved administrations, local authorities, businesses and other local partners to consider how best to identify and support these clusters. The goal is to drive growth while maintaining high environmental standards. The first clusters will be announced in the coming months.
The expressions of interest for the scheme announced in the Mini Budget will not be taken forward.
Some of the announcements in the Budget will have a particular impact on the life sciences sector.
In particular, early stage SMEs in the life sciences sector that undertake core R&D activities for their own account are often reliant on the cash they can claim under the R&D tax credits regime. Changes to this regime will almost halve this cash from the current level of 33.35% of spend, to 18.6% of spend. This clearly will leave a hole in the cashflow forecasts for these businesses from 1 April 2023 that will need addressing.
On the flip side, those life sciences businesses that are subcontracted by a large company to undertake R&D on their behalf should be better off. They can only claim under the large company RDEC scheme with the net benefit increasing from around 10.5% to 15%.
It is clear that the government remains committed to ensuring innovative firms have access to finance to invest and grow. Early stage life sciences businesses should benefit from the previously announced changes to the Seed EIS regime. The government has indicated that the EIS and VCT regimes could be extended in future which should benefit the Live Sciences sector. The government has also confirmed that it will provide increased funding for the UK’s nine Catapults, which support innovation.
There has been speculation of significant changes to Capital Gains Tax rates, but no such announcements were forthcoming. There is still a good level of M&A activity within the sector, so this is good news for those businesses that could look to sell in the near term. However, it is still possible that capital gains tax rates could increase, or other changes could be announced, at a later date, and it will be interesting to see if this possibility stimulates transactional activity over the coming months.
The Chancellor did announce that the exemption for CGT would be halved in 2023/24.
Lastly, for the very largest businesses only, it was confirmed today that the OECD “Pillar 2” framework will be incorporated into UK law for accounting periods beginning on or after 31 December 2023. These rules will introduce a minimum 15% rate of tax. Those life sciences businesses both large enough to fall within Pillar 2, and which claim an effective 10% rate of tax on profits under the UK’s Patent Box regime, will need to consider if these rules will increase their total tax payable.
However, in practice, the vast majority of Patent Box claimants do not have all their profits taxed within the Patent Box. While work may be required to analyse the rules, we would not expect significant tax increases on Patent Box claimants from these changes.
The government has published the outcome of its consultation on the regulatory regime for Insurers, Solvency II, saying it will legislate accordingly.
As part of the consultation response, the government has confirmed a number of changes including a “significant reduction in the Risk Margin”. These are regulatory changes rather than tax-specific ones because the life assurance and general insurance tax regimes are based on the statutory accounts rather than the regulatory return. However, there may be deferred tax implications for Solvency II reporting purposes. For regulatory purposes, insurers will need to assess the impact of the proposed changes on their capital position.
Another point that impacts insurers is the fact that the IFRS 17 tax regulations have still not been published. IFRS 17 applies for accounting periods beginning on or after 1 January 2023, so we would expect tax legislation shortly. Finally, for life assurers writing BLAGAB, the income tax rate is to remain at 20% (as previously announced by the Chancellor in October), so there is currently no requirement to update systems to reflect a change in the policyholder tax rate.
As expected, the Banking Surcharge has reduced from 8% to 3% and will apply to profits over £100m (up from £25m), therefore a tax rate of 28% will apply to such profits from 1 April 2023.
Read our full analysis on the impacts for FS businesses here.
The Chancellor spoke of a continued commitment to investment in innovation as a means to achieve sustainable economic growth, which bodes well for the Technology, Media and Telecoms sector in the long term. However, there were some key announcements that will have a more immediate impact on the sector, like the changes to the R&D tax relief rules and the cost-of-living impact of freezing tax thresholds, which will mean people working in the sector paying more tax.
It was announced that overall, Government spending on R&D would increase to £20 billion by 2024/25. Through the R&D tax relief measures announced, it would appear that the Government wants to encourage large businesses to undertake R&D activity in the UK, either by themselves or by multinationals subcontracting R&D to UK companies. The benefit for larger businesses making claims under the ‘RDEC’ scheme will increase from 1 April 2023 to 15% from the current rate of 10.5%.This increase could convince innovative companies that have previously not made R&D claims to now consider doing so. However, it was bad news for SME claimant companies for whom the R&D tax relief rate will be cut from 130% to 86% from 1 April 2023, and the R&D tax credit rate will reduce to 10% from this date. This results in a reduction in the effective rate of the benefit under the SME R&D scheme to 21.5% (from 24.7%) for profit-making SMEs. The previously announced exclusion of certain overseas costs from qualifying R&D expenditure from 1 April 2023 will have a further detrimental impact on future SME claims, which will be only slightly tempered by the extension of qualifying R&D expenditure to include data and cloud computing costs from the same date.
Businesses in the Technology & Media sector are already facing worker challenges due to scarce resource in the UK and need to retain talent. The announcement of the 45% additional rate income threshold reducing to £125,140 and the freezing of Income Tax and NIC thresholds will mean people in the sector pay more tax and could result in wage inflation. There were a number of measures announced that were aimed at tackling the skills gap, like the appointment of an Advisor on Skills Reform, funding for the Catapult Network and the Advanced Technology Research Centre in Wales, however, they are long term measures targeted at improving skills and expertise that will not bear fruit for the sector for some time.
From an investor perspective, the Government confirmed that they remain supportive of the Enterprise Investment Scheme and the Venture Capital Trust Scheme and has hinted at potentially extending these in the future, which would attract further investment for innovative, high growth businesses in the sector.
R&D tax incentives and Business rates will be the key tax talking points for manufacturers following the Autumn Statement.
The changes to R&D are expected to be a net negative for loss making SMEs, many of which will be focused on making and developing future technologies. Reducing the level of benefit might reduce both the cash available to invest in high-tech manufacturing and future levels of growth in the sector.
The increase in the headline rate for large companies under the RDEC scheme is likely to benefit those who operate at scale, subject to the impact of previously announced restrictions to eligible costs where the R&D takes place outside the UK.
With business rates revaluations resuming in 2023, relief is being made available to limit cost increases. This will be welcome news for manufacturers facing rising energy costs and more general inflationary pressures.
Many of the business rates announcements will also be covered in more detail by our guest speaker at the next Midlands Tax Club meeting on 23 November.
With many of the UK’s manufacturers operating outside of London and the South East, manufacturers will be looking for more detail on the refocused levelling up agenda. The plans announced include the devolution of investment in skills and transport to the mayors of Greater Manchester and the West Midlands. Manufacturers will be hoping to see the investment targeted at their industry.
As the political winds of change of the past weeks start to settle, there were few surprises in Jeremy Hunt’s budget announcement that would alter the strategy for many professional services firms. With a promise of stability however, this does give business leaders the opportunity to reflect and plot a course through the recessionary environment ahead.
The measures in the Statement are unlikely to change the pressures faced by professional services firms. Retaining talent and developing successful people propositions remain the highest priorities. The squeeze on both net pay through increased taxes and inflationary pressures is likely to drive continued volatility.
Directly increasing financial incentives through pay is likely to be less attractive as a result, so refocusing on incentives that align more to the current environment through equity-based awards and deferred variable pay may be more appropriate.
We have now landed on a tax system where partnership structures at the highest marginal rate of tax remain the most tax-efficient, with an effective 47% tax rate compared to 53.4% for salaries and bonuses and 54.5% for extraction by way of dividend (after taking account the higher 25% corporation tax). The ideal operating structure of course is much more nuanced than that, but these are often the rates highlighted.
Overall there was nothing really to surprise professional services firms, but some welcome breathing space has been created to focus on known issues such as basis period reform and the business fundamentals needed to successfully navigate through this recession.
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