06 March 2023
Fiscal and monetary background
Chancellor of the Exchequer, Jeremy Hunt, might have a little bit of wriggle room in his Spring 2023 Budget, but not much. The sharp fall in wholesale energy prices means the cost of the energy price guarantee (EPG) has been about half that expected. This has helped government borrowing to come in much lower than the Office for Budget Responsibility (OBR) expected back in November. However, we think the OBR is set to downgrade its growth forecasts substantially for the latter part of the forecast period, which will severely limit the Chancellor’s ability to increase spending and still meet his fiscal target of getting debt falling within five years.
The OBR will therefore give with one hand but take with the other.
Public sector net borrowing will be a little under £40bn lower this year and next, relative to the forecast from the OBR in November, which predominantly reflects lower debt interest payments and stronger receipts.
What’s more, the economy has turned out to be much more resilient than expected in November. As a result, the OBR should be able to revise up its forecast for growth in GDP in 2023 to about -0.5%, from -1.4% in the 2022 Autumn Statement. This should reduce its forecast for public borrowing in 2023/24 by about £13bn.
All this means that the OBR forecast for borrowing in 2023/24 will probably be around £110bn, significantly lower than the £140bn it forecast in November.
However, the OBR is likely to downgrade its medium-term view of trend productivity growth, reflecting its recent finding that it has been significantly too optimistic about medium-term growth on average. This will significantly increase the borrowing estimates after 2023/24.
The key question is which of these effects will win out in five years’ time (the horizon by which debt must be falling). We think the two effects will largely offset each other meaning that the Chancellor probably won’t have much more cash to spend now than he did in November. As a result, it’s no surprise that Mr Hunt has been downplaying stories that he will cut taxes.
Predictions – highlights
With this backdrop, we expect the Chancellor to make several key tax-related announcements.
We expect him to:
- announce whether the government intends to merge the current research and development tax reliefs into a single scheme;
- provide further details of a domestic minimum top-up tax to apply to very large businesses to ensure their effective tax rate in the UK is at least 15%;
- provide further detail on the proposed investment zones scheme, including the geographical areas selected and the tax reliefs that will be available for businesses operating in the zones;
- confirm reforms to creative sector tax reliefs, including merging the current film and TV tax reliefs into a single scheme and restricting the availability of relief for European Economic Area expenditure for video games developers;
- confirm changes to transfer pricing record keeping requirements;
- confirm technical changes to asset holding company regime;
- increase the money purchase pension contributions allowance for existing pensioners;
- announce a consultation on potential changes to the tax rules affecting hybrid and distance working;
- announce measures in connection with National Insurance contributions to encourage the over 50s to return to or remain in the workforce;
- announce various measures to incentivise parents of young children to return to work, which may include extending free childcare to children under the age of three;
- announce the outcome of the consultation on the VAT treatment of fund management services;
- announce reform of the mixed property and multiple dwellings relief stamp duty land tax rules;
- confirm changes to the rules on sovereign immunity from direct taxes.
The Chancellor may also:
- announce reforms to the capital allowances regime, which provides relief for capital investments made by businesses;
- announce the next steps for making tax digital for corporation tax;
- uplift or otherwise adjust the pension contributions annual allowance and/or lifetime allowance;
- uplift the high income child benefit charge threshold;
- issue a consultation on the beneficial personal tax regime for non-UK domiciled individuals;
- announce various possible changes to capital taxes on individuals, including inheritance tax, capital gains tax and the interaction of these taxes, especially on an individual’s death;
- announce details of changes to the taxation of decentralised finance;
- uprate employment-related expense allowances and deductions to ensure the tax system reflects the costs to employees of such expenditure;
- remove the distinction between employer paid/provided and reimbursed benefits-in-kind;
- announce the outcome of the review of the taxation treatment of electric vehicle charging and the government’s next steps;
- announce a second phase of formal consultation on changes to the VAT land exemption.
Further details on these and other anticipated and potential measures are outlined below.
Discover our predictions for the Budget below.
- Confident predictions
- Reasonable expectations
- Extended predictions
What we are confident will be announced
Research and development (R&D) tax reliefs – In January 2023, the government launched a consultation on merging the two existing schemes of enhanced tax relief for eligible R&D expenditure: the small and medium-sized enterprise (SME) enhanced deduction scheme and the R&D expenditure credit (RDEC), typically claimed by larger companies. Historically, the SME scheme has provided more generous enhanced support than the RDEC, and there are considerable differences in the way the relief is provided and the accounting implications. However, the difference in the level of relief available under the two schemes is expected to narrow considerably from 1 April 2023, following an announcement in the 2022 Autumn Statement. To simplify the UK’s R&D tax relief regime and enable SMEs to benefit from helpful aspects of the current RDEC regime, the government is considering introducing a combined scheme based on the RDEC for businesses of all sizes, which may apply for accounting periods beginning on or after 1 April 2024. The consultation closes two days before the Budget but, notwithstanding the short window available to analyse feedback, we expect the Chancellor to indicate whether the government intends to pursue this policy and, if so, the next steps towards implementation. Given the forthcoming reduction in relief under the current SME scheme, many smaller businesses undertaking R&D activities will be hoping for assurances that the government will continue to support their innovation activity.
Global minimum tax rate for large multinational businesses – In the 2022 Autumn Statement, the government reiterated its commitment to the internationally agreed OECD/G20 pillar two framework, which consists principally of an overlapping set of rules to ensure that large multinational businesses pay a minimum effective rate of tax of 15% in respect of each territory in which they operate. The rules will apply in the UK for accounting periods beginning on or after 31 December 2023, with draft legislation already published in the summer of 2022. We expect the Chancellor to confirm that the relevant provisions will be included in the next Finance Bill, where they will be joined by additional legislation to impose a ‘qualifying domestic minimum top-up tax’. This will ensure that any multinational business that would otherwise have an effective tax rate on its UK operations that is below 15% will pay additional top-up tax in the UK, rather than a foreign parent jurisdiction.
Investment zones and freeports – The investment zones policy proposed by Liz Truss during her short premiership was a key aspect of her economic agenda, and is understood to have resulted in the government entering into talks with large numbers of local councils to designate areas in which businesses can benefit from tax incentives and streamlined regulatory requirements. While the current Chancellor has not abandoned the concept entirely, he appears to have significantly curtailed the potential extent of the scheme by focusing on a smaller number of areas, all with strong links to university research institutions. We expect the Chancellor to provide more detail on his vision for investment zones in his Budget speech, and to confirm the location of one or more new freeport sites (a concept similar to investment zones, but with more limited tax and regulatory benefits) to be established in Wales.
Creative sector tax reliefs – In November 2022, the government consulted on potential reforms to the UK’s creative sector tax reliefs, which apply to the UK’s film, TV (comprising high-end TV, children’s TV programmes, and animation) and video games industries, with the aim of simplifying and modernising these reliefs. Proposals under consideration include:
- merging the film and TV reliefs into a single scheme and modernising certain aspects to reflect developments in these industries;
- replacing all the existing audio-visual reliefs with an expenditure credit mechanism similar to the RDEC, to ensure that they operate to provide additional relief as intended when the OECD/G20’s global minimum tax rate rules take effect; and
- restricting the availability of relief for video game developers’ expenditure to focus on that used or consumed in the UK, thereby denying enhanced relief for certain expenditure incurred in the European Economic Area (EEA) that is eligible under the current rules.
While many of the proposed reforms considered may be welcomed by the relevant sectors, some video games developers with significant EEA-based workforces could lose out. We expect the Chancellor to confirm during the Budget which of the proposals the government will take forward.
Changes to transfer pricing record keeping requirements – In December 2022, the government published draft legislation for additional record-keeping requirements relating to transfer pricing (ie the pricing of transactions between connected parties), including a requirement for UK entities within large multinational groups to prepare documentation supporting their transfer pricing policies in a format prescribed by the OECD. We expect the government to confirm, either during the Budget or shortly thereafter, that the relevant provisions will be included in the next Finance Bill.
Technical changes to asset holding company regime – The government published draft legislation in July 2022 that would implement certain technical changes to ensure the effective operation of the qualifying asset holding company tax regime, which seeks to make the UK an attractive jurisdiction for locating asset management activities. We expect the government to confirm, either during the Budget or shortly thereafter, that the relevant provisions will be included in the next Finance Bill.
Money purchase allowance for existing pensioners – Given the current level of employment vacancies and labour shortages, believed by some to be significantly magnified by many aged over 50 retiring earlier than expected in the aftermath of the coronavirus pandemic, encouraging this group to return to work appears to be a priority for the Chancellor. To help persuade many of this group to do so, it may be necessary to review or uplift the money purchase annual allowance, which is a restriction to the annual pension contributions allowance for those who have already flexibly accessed pension funds. The allowance is currently set at £4,000 per annum, compared to the £40,000 standard annual allowance. The current low-level of this allowance may act as a barrier to those seeking to re-commence employment as they may be unable to take full advantage of an employer’s pension benefits, so we expect the Chancellor to seek to remove or reduce this barrier to work to help achieve his objective of growing the workforce.
Attracting over 50s back to work – In addition to the possible reform of pension contribution allowances for those who have already flexibly accessed occupational pensions, we may see incentives offered to employers for hiring over 50s to help grow the workforce. For example, employers could be offered relief from employer’s class 1 National Insurance contributions (NICs) for over 50s, on a similar basis to the regime for employers hiring apprentices aged under 25, and/or NICs could be abolished for employment and self-employment income of individuals aged over 50 (or higher). We expect the Chancellor to announce measures in connection with NICs to encourage the over 50s to return to or remain in the workforce.
Hybrid and remote working employees – The now disbanded Office of Tax Simplification (OTS) issued a report on hybrid (part employer workplace, part home) and distance (overseas) working in December 2022. A driver for the OTS report was that home and distance working have become commonplace following the coronavirus pandemic and, despite a significant shift in working patterns, most of the relevant tax legislation and HMRC guidance in this area was written when individuals adopting such work practices were a tiny minority of the workforce. A significant number of recommendations are made in the OTS report, including suggestions for the government to review and revise many longstanding tax rules and practices, such as those for business travel expenses, cross-border working and permanent establishments, as well as cross-border payroll guidance. We expect the Chancellor will announce a consultation on potential changes to the tax rules affecting hybrid and distance working.
Free and tax-free childcare – The Chancellor has expressed concern regarding the economic inactivity rate and seems likely to initially target bringing over 50 year old retirees back to the job market. However, the cost of childcare in the UK is also seemingly a significant contributory factor to the economic activity rate, with a recent survey commissioned by leading childcare providers finding 70% of parents would work more if childcare was free. Currently, working taxpayers may be eligible for up to 30 hours of free childcare for their three- and four-year-old children. We expect the Chancellor to announce measures to incentivise more of this taxpayer group to return to work, which may include extending free childcare to children under the age of three. Following calls from the Chartered Institute of Taxation (CIOT), the Chancellor may also announce that the employer-supported childcare scheme, which was closed to new entrants in October 2018, will be re-opened for new joiners. Additionally, or alternatively, the tax-free childcare scheme, which was introduced as a successor to the employer-supported childcare scheme and ordinarily allows parents to claim up to £2,000 per annum towards the cost of childcare for each child up to the age of 11, may be reformed in a bid to increase uptake.
VAT and indirect taxes
VAT treatment of fund management services – In December 2022, a consultation was issued in respect of the VAT treatment of fund management services and, in particular, a proposal to clarify the definition of special investment fund in UK VAT legislation to help to provide greater certainty regarding the VAT treatment of fund management services for both managers and investment funds. We expect the Chancellor to announce the outcome of this consultation and next steps.
Reform of mixed property and multiple dwellings relief rules – In September 2022, then Chancellor Kwasi Kwarteng announced cuts to stamp duty land tax (SDLT) in the form of changes to the rates and bands applicable to residential property and to first time buyers’ relief. In November 2022, the new Chancellor, Jeremy Hunt, announced these cuts would be time limited, applying only until 31 March 2025. Consequently, we do not anticipate any further changes to the headline rates of SDLT applicable to residential property in the Spring Budget, but we are anticipating specific announcements in response to an HMRC consultation relating to mixed-property purchases (ie purchases of property with mixed residential and non-residential use) and multiple dwellings relief, issued in November 2021. The aim of the consultation was to consider changes intended to make the SDLT system fairer whilst reducing the scope for incorrect returns and the promotion of abusive claims by disreputable agents. A considerable amount of litigation in relation to these issues has passed through the tax tribunals in recent years, so we expect that the government will seek to resolve uncertainty and deter abuse of the rules by announcing reforms to these aspects of the SDLT regime.
Sovereign immunity from direct taxes – During 2022, the government consulted on proposals for reforming the treatment of foreign sovereign persons (individual heads of state and foreign governments, including sovereign wealth funds) for UK direct tax purposes. The consultation proposed that, while sovereign persons will continue to be exempt from UK taxation on UK sourced interest income relating to non-trading activities, they will no longer be exempt from direct taxation on other forms of UK source income and gains, such as trading income, property rental income and capital gains. This would align the UK tax treatment of sovereign persons with their tax treatment in other comparable jurisdictions. Although there is a risk that the UK may become a less attractive destination for foreign sovereign investment, it is believed that, overall, the proposed reforms are likely to result in an increase in tax revenues for the Exchequer, so we expect the Chancellor to confirm that the proposals outlined in the consultation will be implemented.
What we might reasonably expect to be announced
Capital allowances – A major incentive for capital investment, the 130% ‘super-deduction’ available to companies for expenditure on most new plant and machinery, is due to end on 31 March 2023. A wide-ranging consultation took place during 2022 to consider what the UK’s capital allowances tax relief regime for investment in plant and machinery should look like over the longer term. Following this consultation, former Chancellor Kwasi Kwarteng announced that the annual investment allowance (which provides 100% tax relief for capital expenditure in the year of acquisition) will be set at £1m permanently, having been due to return to £200,000 from 1 April 2023. While this has been welcomed by many, the government has not yet provided a detailed response to the consultation feedback, and is yet to confirm whether it is considering more radical reforms. It is notable, in particular, that, as the scale of a capital investment project gets larger, the incentive effect of a £1m annual investment allowance reduces. Therefore, it is reasonable to expect that the Chancellor may announce further consultation on more extensive reforms, perhaps including uncapped first-year allowances for expenditure meeting suitable conditions.
Making tax digital for corporation tax – In November 2020, the government launched a consultation on the detail of a more fully digitalised framework for corporation tax, which would include requirements to maintain fully digital records and for most companies to provide quarterly financial updates to HMRC. At the time, it was anticipated that compliance with these new requirements could become mandatory from April 2026. However, it was announced in December 2022 that the start-date for the mandatory application of the related making tax digital regime for income tax self-assessment would be pushed back from April 2024 to April 2026 at the earliest. There have been no further announcements to indicate that the implementation of making tax digital for corporation tax may be similarly delayed, but attempting to meet the existing timetable for an April 2026 start-date would now be ambitious for HMRC and taxpayers alike. It is therefore reasonable to expect that the next steps for this important project will be announced in the Budget, to provide it with fresh impetus and allow companies to plan their response.
Pension contributions allowances – There are two key tax allowances that restrict pension contributions and other inputs to pension schemes: the annual allowance, which, broadly, limits the amount of annual pension contributions and other inputs attracting tax relief that can be made by or on behalf of an individual in a tax year; and, the lifetime allowance, which limits the total value of pension savings an individual can hold without suffering additional tax charges on withdrawal. The recent period of high inflation has seen taxpayers’ ability to make pension contributions more likely to be subject to restriction by the operation of the annual allowance and lifetime allowance and related tax charges, particularly those in defined benefit pension schemes where the value of their pension contributions is deemed to include growth in the value of their fund, including inflation-linked adjustments. The standard annual pension contributions allowance has been set at £40,000 since April 2014 and the lifetime allowance has been at its current level of £1,073,100 since April 2020. Although the lifetime allowance was already subject to an extended freeze until April 2026, given that, unlike many other allowances, the pension allowances were not subject to announcements of new or confirmation of existing extended freezes in the Autumn Statement, it would be reasonable for the Chancellor to uplift or otherwise adjust one or both of these allowances in the Spring Budget to acknowledge the effect of recent and continuing inflation.
High income child benefit charge (HICBC) – The HICBC has been controversial since its introduction a decade ago, as the charge is assessed based on an individual earner’s income and not the total income of the household in receipt of child benefit. Therefore, an individual with a £60,000 salary, even with a non-earning partner, would incur an income tax charge equivalent to all the child benefit received by the household in a particular tax year, whilst a couple earning £50,000 each would not incur a charge at all. As well as questions of fairness around the basis of the charge, the threshold for the charge, at £50,000, is contentious as it has remained unchanged since its introduction in 2013 and now falls within the basic rate tax band. Whilst some may be hopeful for the HICBC to be scrapped or reformed on a wider scale, it may reasonably be expected that the Chancellor will, at least, uplift the threshold.
The beneficial personal tax regime for non-UK domiciled individuals – The Labour party has previously announced that, if elected, it would abolish the preferential tax status for non-domiciled individuals and replace it with a ‘modern scheme for people who are genuinely living in the UK for short periods’. Given rising political pressure, the Chancellor may be considering the tax regime for non-domiciled individuals. However, as consultation will be necessary to ensure that any changes to the regime do not make the UK unattractive to foreign investment, which could reduce UK tax receipts, it would be reasonable to expect the Chancellor to issue a consultation on this area of taxation.
Inheritance tax – In his time as Chancellor, Rishi Sunak decided not to take any action following the now disbanded Office of Tax Simplification (OTS) review of inheritance tax (IHT) in 2019, which provided several suggestions for simplification of IHT. Subsequently, the only mention of IHT in a government fiscal event has been in the 2022 Autumn Statement, when the period for which the IHT nil-rate band (NRB) and residential nil-rate band (RNRB) will be frozen was extended to April 2028. However, should the current Chancellor be inclined to make changes, particularly given increases in house prices since the beginning of the coronavirus pandemic, inflationary increases in asset values in recent months and the likelihood of further increases into the foreseeable future, the simplest change, which would not interfere with the frozen thresholds, may be to reduce the headline rate of IHT. Other potential IHT changes recommended in the OTS report include reducing the seven-year accumulation period for transfers of value to five years and scrapping the various annual and other gifting allowances – the value of many of which has remained unchanged since the 1980s – and replacing them with a single simplified universal annual gifting allowance. Abolishing the RNRB, which currently excludes up to £175,000 of value derived from qualifying property from IHT, and instead proportionately increasing the NRB is a more significant change, but one that would promote equality, especially as the RNRB rules are widely considered to be unduly complicated and are not available to all taxpayers by design. In addition, the Association of Taxation Technicians (ATT) has suggested the existing 12-month post-death period in which relief can be claimed for shares sold at a loss should be extended to a minimum of 18 months, specifically because the current delay to probate applications has prevented executors from being able to realise losses, or dispose of any assets, in the 12 months following a death. The adoption of any of these recommendations could reduce the IHT burden on those least able to afford it and should be on the Chancellor’s radar and it would be reasonable for him to announce a review of what changes might now be appropriate.
Capital gains tax rebasing on death – Currently, assets inherited following an individual’s death are rebased for capital gains tax (CGT) purposes to their market value at the date of death. This was identified as an area for consideration in the Office of Tax Simplification’s (OTS’s) 2019 inheritance tax review, which noted that this potential tax-free uplift may disincentivise taxpayers from making lifetime gifts due to the adverse CGT impact of doing so. This slows the passing on of wealth between generations, even where there is a strong commercial or personal rationale to make such gifts. The OTS suggested that the CGT base cost revision could be scrapped to level the playing field between lifetime gifts and bequeathing assets in a will. The overall impact of such a measure would generally be to increase the level of taxation on an individual’s assets, either through earlier payment of CGT on gifts or increased CGT payable in the future following a post-death sale of the assets, so the Chancellor may reasonably be expected to be considering the options for reform in this area, perhaps as part of a package of capital taxes reforms.
Other capital gains tax measures – The Office of Tax Simplification (OTS) published two reports on capital gains tax (CGT) in 2020 and 2021, following a request from then-Chancellor, Rishi Sunak. The reports were wide-reaching, addressing several areas that may give rise to small technical changes to CGT and the boundary between CGT and income tax. Only a couple of matters have been addressed following the publication of these reports, including proposed changes to extend the period in which transfers can be made between divorcing or separating spouses and civil partners without incurring a CGT liability, which are currently intended to come into force from 6 April 2023. Although draft legislation has been published, it has not yet been included in a Finance Bill and is now unlikely to be enacted before 6 April 2023, leaving the possibility that the effective date may change. When Chancellor, Mr Sunak stated that several of the other points raised in the OTS reports would be considered in further detail and potentially consulted on in future. We may therefore see further CGT changes announced or consulted on. Most significantly, the OTS and other commentators have previously remarked on the scope to amend, reduce and/or remove certain reliefs from CGT. Business asset disposal relief (BADR) provides a reduced 10% rate of CGT on gains by entrepreneurs and other owner managers on genuine business investment in which they are active participants. While there appears to be little scope to reduce the rate or maximum value of BADR, there may be more scope for the Chancellor to amend investor’s relief, a similar relief that applies to passive investments in qualifying businesses. Investor’s relief was introduced to supplement BADR, but still retains its original £10m lifetime gains limit whilst the equivalent limit has been reduced to £1m for gains eligible for relief under BADR. An estimated 60 individuals claimed investor’s relief in the 2020/21 tax year, the second year in which it was available, suggesting that it is not currently meeting its aim of encouraging investment in small and medium sized UK businesses. It may be reasonable to expect the Chancellor to be considering a review of these and several other reliefs that defer or exempt gains arising in various circumstances from CGT.
Taxation of decentralised finance – During 2022, the government consulted on reforming the taxation of decentralised finance involving the lending and staking of crypto-assets. The tax treatment that currently applies often does not accurately reflect the underlying economic reality of the relevant transactions, so several options for reform were proposed. In light of Rishi Sunak’s aim, outlined when he was Chancellor, to ‘make the UK a global hub for crypto-asset technology and investment’, we expect the government to be keen to make appropriate changes. It would therefore be reasonable to expect the Chancellor to announce details of which option will be implemented, along with the timeframe for the publication of draft legislation.
Fixed allowances and deductions – The Chartered Institute of Taxation (CIOT) and Association of Tax Technicians (ATT) have both recently called for the approved mileage allowance payment (AMAP) rates, which have not changed in over a decade, to be uprated to better reflect the current costs of running and maintaining a personal vehicle for business travel. The CIOT has also suggested that a significant number of other business-related expenditure fixed allowances and deductions, such as those for meals and subsistence, household expenses (for those required to work from home), and the so-called trivial benefits exemption, should be reviewed in view of the ongoing period of high inflation and the time elapsed since many of these were introduced or last increased. It is reasonable to expect that the Chancellor will uprate these allowances and deductions to ensure the tax system reflects the costs to employees of such business-related expenditure and be seen to provide support in light of the current cost of living crisis.
General employment taxes simplification – The Chartered Institute of Taxation (CIOT) has published numerous suggestions to simplify employment taxes. A recurring theme in these suggestions is to remove the distinction between employer paid/provided benefits-in-kind and reimbursed benefits-in-kind. Under present rules, the tax treatment of benefits-in-kind provided to employees may differ greatly depending on whether the employer incurs the cost directly or they reimburse the employee for the cost incurred personally. The CIOT has suggested that the distinction, which does not appear to serve any clear purpose, is removed to simplify what is, in any event, a highly complicated area of taxation. It is reasonable to expect the Chancellor to initiate a review of the taxation of benefits-in-kind generally, but he could take the opportunity to remove the distinction between employer paid/provided and reimbursed benefits-in-kind immediately.
VAT and indirect taxes
Charging of electric vehicles – HMRC has reviewed the entitlement of businesses to recover VAT on the costs of charging electric vehicles. In January 2022, HMRC and HM Treasury reported receiving representations from businesses and pressure groups about the limited options for reclaiming VAT on these costs. In particular, HMRC is understood to be reconsidering its current policy that businesses cannot recover VAT on employee expense claims for the costs of charging an electric vehicle at home for business trips. It is also understood to be considering a simplified method for apportioning the cost of charging company cars between business and private use of the vehicles by employees. It is reasonable to expect that the Chancellor will announce the outcome of the review and the government’s next steps.
The VAT land exemption – HMRC released a summary of the responses to a consultation on possible reforms to the VAT regime for land and property in November 2021, the complexity of which it accepts is causing difficulties for the real estate sector. The consultation identified four options for simplification of the VAT rules in this area, being:
- making short-term and minor interests in land and property subject to VAT;
- updating the anti-avoidance rules relating to the option to tax land and property;
- establishing a more comprehensive and accessible register of existing options to tax to allow taxpayers to check whether a supplier has opted to tax a particular property; and
- removing the option to tax altogether and making supplies of land and property subject to VAT by default, with a limited number of exceptions (eg for residential accommodation and buildings used for a charitable purpose).
Following informal discussions with stakeholders during 2022, it is reasonable to expect the Chancellor to announce a second phase of formal consultation before any of these proposals are taken forward.
What could be announced at a stretch
Corporation tax rates – Legislation to increase the main rate of corporation to 25% with effect from 1 April 2023 was included in Finance Act 2021. In September 2022, then Chancellor Kwasi Kwarteng announced the reversal of this increase. However, the new Chancellor, Jeremy Hunt, subsequently announced that the original policy to increase the main rate would not be changed. Despite the U-turn by Mr Hunt being seen as an important factor in managing the financial markets’ expectations following negative perceptions towards the overall package of unfunded tax cuts announced by Mr Kwarteng, the government is under pressure from a section of its MPs to undertake a further U-turn to keep corporation tax at 19%. It appears unlikely that such a further change will be announced, as it is important that the government is seen to stick to the policies that helped stabilise the financial markets, but some form of compromise is not completely out of the question.
Research and development (R&D) tax reliefs – In July 2022, the government published draft legislation for reforms to the current R&D enhanced tax reliefs regimes, including a number of measures intended to tackle perceived abuse of the reliefs. One of the more controversial of these measures is a requirement for new claimants to notify HMRC of their intention to claim enhanced relief within six months of the end of the period to which the claim relates, significantly in advance of the two-year deadline for submitting such claims. Objections to this proposal have been raised by professional services firms, industry bodies and even the House of Lords Economic Affairs Finance Bill Sub-Committee. The common theme is that the requirement is unlikely to be successful in reducing abusive claims, but may prevent genuine claimants, particularly start-up businesses, from obtaining relief to which they are otherwise entitled. There has also been significant concern raised by some smaller businesses and their representatives about the already enacted reduction in the enhanced relief available to SMEs from 1 April 2023. While full U-turns on these changes are unlikely, we believe that targeted measures to mitigate some of the associated challenges are not out of the question.
OECD pillar one and digital services tax – Pillar one of the OECD/G20 response to the tax challenges arising from the digitalisation and globalisation of the economy comprises proposed new rules regarding the allocation of taxing rights between tax jurisdictions. It includes, in particular, new rules to allocate taxing rights on profits made by the world’s largest businesses to jurisdictions in which they may have no or limited physical presence, but in which their customers or users are located. If consensus can be reached, this will entail the removal of unilateral digital services taxes, including the one implemented by the UK. International negotiations regarding pillar one are proving more challenging than those in respect of pillar two (which applies a global minimum tax rate of 15% to the profits of in-scope businesses in all the jurisdictions in which they operate), so it may be too early for concrete announcements, but the Chancellor may give an update on the expected timetable for implementation of the anticipated pillar one rules and the repeal of the current UK digital services tax.
Cutting the income tax basic rate – While he was Chancellor, Rishi Sunak announced that the basic rate of income tax would be cut to 19% from April 2024. In his brief stint as Chancellor, Kwasi Kwarteng sought to advance this cut to April 2023. Mr Kwarteng’s announcement was later reversed by Jeremy Hunt, with both the Chancellor and the Prime Minister stating their desire to cut the basic rate of income tax to 19% ‘when economic conditions allow for it and a change is affordable’. Given the record income tax receipts in recent months, it will be interesting to see whether any comment is made on reducing the basic rate of income tax and, if so, when this might be.
Tax easements for residential landlords – Many residential property landlords whose property businesses are not operated through a company may be surprised to find their tax bills are not substantially decreasing, despite their cash profits declining significantly due to the increased cost of borrowing. Finance costs for residential landlords are generally not deductible in arriving at taxable profits. Instead, taxpayers can deduct a tax credit equal to 20% of the finance costs incurred from their tax bill, which can, in some circumstances, result in a net 25% income tax charge on rental income before interest, that has already been spent on the interest payments due. Even worse, the taxpayer may also incur other means tested tax charges, such as the high income child benefit charge or the tapering of the personal allowance, due to their total taxable income for such purposes being measured before the deduction of finance costs. In view of the issues caused by the tax treatment of interest for residential landlords, it is possible the Chancellor may propose changes to assist them and support the housing market, given that the cost of borrowing is at its highest rate since the finance cost restriction was introduced almost six years ago.
Alignment of income tax and National Insurance contribution thresholds – From 6 April 2023, both the Class 1 primary National Insurance contributions (NICs) threshold and the Class 4 NICs threshold will be £12,570, which aligns with the standard income tax personal allowance. This presents an opportunity for the basic rate of income tax to be merged with the NICs rates, providing potential for a significant tax simplification. While this presents issues for those in receipt of income that is not subject to NICs, it is possible that the Chancellor may be considering options to take advantage of the opportunity to simplify the tax system in this regard.
Wealth tax – Particularly since the outbreak of the coronavirus pandemic, there has been speculation about the possible introduction of a wealth tax as a means of increasing tax receipts. While any wealth tax is likely to unpopular with traditional Conservative voters, it is possible that such an option could still be considered by the Chancellor, perhaps as a ‘one-off’ charge on property-based assets aimed at reducing the budget deficit and addressing growing inequality in the UK. Whilst controversial, the Chancellor may take the opportunity to consult on how a wealth tax might be introduced and what form it might take.
Off-payroll working – The Chancellor made no comment on the administrative rules for off-payroll working in the 2022 Autumn Statement, having previously scrapped Kwasi Kwarteng’s proposed repeal of these rules, which pass the obligation for assessing whether the IR35 off-payroll working rules apply to the engaging entity for public sector and other medium and large-sized entities. Notwithstanding this, the tax saving available to individuals using personal service companies (PSCs) for off-payroll working will reduce from April 2023, as corporation tax rates increase and the dividend allowance for individuals extracting profits from their PSC is reduced, with higher and additional rate UK taxpayers likely to incur a higher overall tax liability by using a PSC than if they were engaged as employees if they extract all ongoing profits from the PSC as dividends. In contrast, the extraction of funds by way of dividends will almost always remain more tax efficient for basic rate and all Scottish taxpayers. Whilst the reducing tax saving may discourage some taxpayers from entering such arrangements, there remains a need to review and consider whether there is scope to simplify the tax rules regarding employment status and the administration of this complex area of taxation. It will be interesting to see if the Chancellor is prepared to engage with the issues that appear to have been deferred indefinitely by his predecessors.
Modernisation of stamp taxes on shares – During 2020, the government sought views on the principles and design of a new framework for stamp duty and stamp duty reserve tax (SDRT), with the existing framework considered by some to be archaic. There have been no subsequent developments on this issue, and while it may have been overtaken by more pressing political priorities, the need for modernisation has not gone away. It is therefore possible that an update will be provided on Budget day regarding next steps towards implementing a single unified tax on share transactions.
Residential and non-residential stamp duty land tax (SDLT) property band alignment – As a result of the current temporary increase in the residential SDLT tax-free band to £250,000, the amount of consideration needed before SDLT is payable on residential property transactions is now significantly higher than for non-residential (eg commercial) property, for which the tax-free band remains at £150,000. For this reason, a person acquiring property in England or Northern Ireland for less than £965,000 could pay less SDLT on an acquisition of residential property than they would on an acquisition of commercial property. Given circumstances within the wider economy and the impact of the coronavirus pandemic on the commercial property market, the Chancellor may be persuaded that an extension of the non-residential tax-free band would be a means of providing support to businesses.
Increasing the higher rate for additional dwellings (HRAD) surcharge – Taxing rights in relation to property transactions in Scotland and Wales are devolved. Instead of SDLT (which applies in England and Northern Ireland), Scotland has land and buildings transaction tax (LBTT) and Wales has land transaction tax (LTT). In the latest Scottish Budget, which took place on 15 December 2022, the additional dwelling supplement (ADS), which imposes a higher rate of LBTT to residential property purchases by those who already own another home, was increased from 4% to 6%. A similar surcharge applies under SDLT, known as the higher rate for additional dwellings (HRAD), and this has been set at 3% since it was introduced in April 2016. Given the increase to ADS in Scotland, and political pressure to provide further support to first-time buyers in England and Northern Ireland, the Chancellor may consider increasing the HRAD to help pay for such support.
Tax administration and collection
Reforming the tax administration framework and timely payment – During 2021, the government consulted on measures to reform and update the tax administration framework, which would entail a long overdue rewrite of the Taxes Management Act 1970, and potential moves towards more frequent, in-year payment of self-assessment income tax and corporation tax. These are long-term aims which will not be implemented in the current parliament, but the Chancellor may outline some next steps to demonstrate progress in the government’s ongoing efforts to simplify and modernise the tax system.
Energy profits levy – In May 2022, the government introduced the energy profits levy in response to the record profits of oil and gas companies, due to the increased market price of these commodities driven by global circumstances, including Russia’s invasion of Ukraine. The levy was increased from 1 January 2023 as part of a package of measures intended to help fund the energy price guarantee for consumers and reduce public debt. However, data published in January 2023 by the Office for Budget Responsibility (OBR) shows that, to that date, the levy has raised £600m less in tax revenues than originally anticipated, a shortfall of almost 25%. While the OBR suggests that this may be due to the volatility in oil and gas prices or timing effects, some have speculated that it is a consequence of the tax relief available for certain investments, which reduces the chargeable profits the levy applies to. Consequently, some are calling for the levy to be reformed, although such a change is likely to be unpopular with the energy industry, particularly given the news that some energy companies have already announced cuts to their UK workforce due to the levy. The Chancellor may therefore announce reforms intended to address shortfalls in expected tax revenues. However, he may also wish to carefully balance such reforms and avoid sending out an ‘anti-business’ or ‘anti-investment’ message given the criticism the government has received in recent weeks from some Conservative backbenchers.
Electricity generator levy – The electricity generator levy, announced by the Chancellor in his Autumn Statement 2022, which applies to low carbon UK electricity generators, has been criticised by some industry groups, as currently there is no mechanism for relief in respect of capital investments made by in-scope businesses. While the government may wish to avoid the perception that it is favouring oil and gas companies over low carbon electricity generators by making appropriate changes to this levy, such concerns will need to be balanced against its wider aim of reducing public debt.