- Innovation incentives
- Windfall taxes
- Capital allowances
- OECD pillar two
- Transfer pricing
- Diverted profits tax
- Annual tax on enveloped dwellings
- Stamp duty land tax
- Business rate
The chancellor’s Autumn Statement speech was relatively light on content in respect of corporation tax, except for the announcements regarding changes to research and development (R&D) tax relief and the proposed windfall taxes on energy companies. However, the associated press releases provide some interesting and potentially significant developments for business taxation.
Research and development tax reliefs
It is known by those that work in the field, and has recently been reported more widely, that the cost to the public finances of delivering the research and development (R&D) tax relief regime for small and medium-sized enterprises (SMEs) has increased dramatically in recent years. Abuse of the system is rife, leaving a regime that has long been a cornerstone of the government’s industrial strategy in the spotlight.
With that backdrop, the chancellor announced changes in the Autumn Statement that will reduce the value of the regime to SMEs. From 1 April 2023, the enhanced tax deduction available to SMEs in respect of qualifying R&D expenditure will decrease from 130% to 86%, and the payable credit for loss-making SMEs will be cut from 14.5% to 10%. When the increase to corporation tax rates from 19% to 25% from 1 April 2023 is taken into account, the SME R&D tax reliefs will be worth 21.5p for every £1 of qualifying expenditure to profitable companies, down from 24.7p currently, and the benefit falls from 33.35p to 18.6p per £1 for loss-making businesses.
This will be a significant blow to the SME community, increasing the net cost of innovation to small, fast-growing businesses that play a large part in delivering the government’s industrial strategy. It is unclear why the government considers that reducing the rate of relief is the most effective route to targeting abuse of the system – a more targeted measure may have been to reintroduce a ‘de minimis’ limit, given the majority of abuse relates to high volume, low value claims. This would have reduced the collateral damage to genuine SME claimants, and a cynic might say that the measures announced have more to do with reducing the cost of delivering the relief to the exchequer than with reducing fraud in the system, with a potential impact on investment in more marginal genuinely innovative projects.
In positive and long overdue contrary news for large companies, the R&D expenditure credit (RDEC) for large companies will increase from 13% to 20% from 1 April 2023. When taking account of the increasing rate of corporation tax, this gives an increase in the net benefit of the RDEC from 10.53% to 15%.
The government will consult more widely to ensure that the R&D tax reliefs remain effective and competitive, including consultation on the design of a single scheme available to all businesses. It has also pledged to work with the business community to understand whether further support is necessary for R&D intensive SMEs, but has indicated that this would need to be accomplished without significant change to the overall cost of the relief.
As previously announced in the 2021 Autumn Budget, the R&D tax reliefs will be reformed by expanding the scope of qualifying expenditure to include data and cloud computing costs, refocusing support towards innovation in the UK, targeting abuse and improving compliance. These changes will be legislated for in Finance Bill 2023.
The patent box regime provides for an effective corporation tax rate of 10% on profits attributable to qualifying intellectual property rights, typically patents. Whilst there were no announcements in the Autumn Statement in relation to the patent box regime, as a consequence of the main rate of corporation tax increasing from 19% to 25%, the maximum benefit from the regime will increase by two thirds, with the tax rate differential increasing from 9% to 15%.
Creative sector tax reliefs
The chancellor has announced a consultation on improving the audio-visual subset of the creative sector tax reliefs, covering films, animations, high-end TV, children’s TV and video games production activities. These reliefs have been very successful in supporting a thriving audio-visual industry in the UK, and we welcome the consultation on improving them. The creative tax reliefs have not changed substantially since they were originally introduced; whereas the relevant industries have seen dramatic changes in recent years. The government has listened to concerns and will seek to modernise and streamline the reliefs whilst ensuring they remain competitive on the global stage. Amongst many proposed changes considered for introduction from spring 2024, we expect that bringing more certainty to the operation of the reliefs and allowing companies to recognise credits above the profit before tax line will help to encourage further investment in these important industries. We look forward to responding to the consultation.
The chancellor announced that, from 1 January 2023, there will be a 10% increase in the temporary energy profits levy applying to oil and gas exploration and production companies, increasing from 25%to 35%. The levy will now apply for longer, until 31 March 2028, with the government suggesting that it will raise more than £40bn in tax revenues over the next six years.
An electricity generator levy has also been announced, being a temporary 45% levy on extraordinary returns exceeding £10m arising from low-carbon UK electricity generation. This will apply between 1 January 2023 and 31 March 2028.
Whilst announcements in this area were expected and will be welcomed by many who have been calling for energy companies to pay more towards balancing the books, the impact of these windfall taxes on investment decisions over the next six years remains to be seen. It is also clear that the windfall taxes alone will not be sufficient to enable the government to meet its fiscal targets.
There were no significant announcements from a capital allowances perspective. The only new policy was an extension of 100% first year allowances for electric vehicle charging points until 31 March 2025, which complements the government’s stated intention of reducing carbon emissions.
In light of the higher tax burden facing companies as a consequence of the forthcoming increase in the main rate of corporation tax to 25%, and the fact that capital investment in the UK is already behind comparable countries, many will be disappointed that the government has not introduced further measures to encourage business investment. This is particularly surprising given that earlier this year, whilst he was chancellor, Mr Sunak set out a tax plan which suggested that the UK tax system does not reward business investment as much as other countries do and promised to consider measures to address this.
The government has also reconfirmed that it is pressing ahead with the internationally agreed OECD pillar two framework. This applies to large multinational groups and is intended to apply a global minimum effective rate of tax of 15% for each territory in which the business operates. The so-called income inclusion rule, which is the central element of the OECD’s plan and will generally collect any additional tax required to meet the global minimum rate in the group’s parent entity’s territory of residence, will be introduced with effect for accounting periods beginning on or after 31 December 2023. However, a domestic minimum tax will also be introduced in the UK, such that where a group’s UK operations otherwise incur an effective tax rate of less than 15% (perhaps due to certain enhanced reliefs), it will be required to pay additional top-up tax in the UK, rather than overseas, to take their effective tax rate to 15%.
Most other major economies will be introducing similar rules in response to the OECD pillar two framework, resulting in an additional compliance burden for large multinational groups, that will need to consider their effective tax rate in each jurisdiction in which they have a taxable presence.
Further to recent consultation on the administrative requirements under the UK’s transfer pricing legislation, the government has reconfirmed that, from April 2023, large multinational businesses (with global revenue of €750 million or more) operating in the UK will be required to keep and retain transfer pricing documentation in a prescribed and standardised format. This will include a master file and a local file, with the aim of allowing HMRC to effectively identify risks and conduct transfer pricing investigations more efficiently. This has been a long time coming, but the government will hope it encourages large multinational groups to get their transfer pricing affairs in order, and it will certainly result in significant additional administrative requirements for some larger taxpayers.
In line with the forthcoming increase in the main rate of corporation tax by 6%, the government has announced that from April 2023, it will increase the diverted profits tax (DPT) rate from 25% to 31%. DPT is a punitive tax applied to large multinational enterprises with business activities in the UK that enter into contrived arrangements to divert profits from the UK by avoiding a UK taxable presence or by entering into contrived arrangements between connected parties. The move to increase DPT is unsurprising, as the government seeks to ensure it remains an effective deterrent against companies diverting taxable profits out of the UK.
Another unsurprising announcement is that chargeable amounts for the annual tax on enveloped dwellings (ATED) for the 2023/24 charging period will be uplifted by the consumer price index (CPI) inflation rate for September of 10.1%. Unless an exemption from the ATED charge applies, it is payable by companies and other non-natural persons that own residential property valued in excess of £500,000. This means that the ATED charged on a property valued at £1.5m will increase from £7,700 in 2022/23 to £8,450 in 2023/24. This will only make an inflationary difference to the government’s overall finances as none of the exemptions have been removed or amended to bring additional properties within the ATED charge.
The increase in the threshold for the nil rate band on acquisition of a single residential property (which is not an additional property) in England and Northern Ireland announced on 23 September 2022 will remain in place until 31 March 2025.
|Small (RV up to £20,000, or £28,000 in London)||
|Medium (RV between £20,000 and £100,000)||15%||25%||40%|
|Large (RV greater than £100,000)||30%||
Additional support will also be extended for the retail, hospitality and leisure sectors, with an increase in business rate relief from 50% to 75% (up to £110,000 per business) in 2023/24.
In summary, most of these announcements were expected, and for many businesses the most significant development on the horizon is the already announced increase in the main rate of corporation tax to 25% from 1 April 2023.
With growth being a priority for the government, it will be interesting to see how the announcements impact investment in the UK. The government argues that, even at 25%, the UK will still have the lowest corporation tax rate in the G7 and remain competitive internationally. However, the UK has a longstanding issue with productivity and one of the reasons for this is a lack of capital investment (UK companies invest less as a percentage of GDP than counterparts in comparable countries, as the former chancellor's tax plan published in the spring acknowledged). In our view, nothing in the Autumn Statement addresses this issue.