A&M Tax Advisor Update
Chancellor of the Exchequer Jeremy Hunt has delivered his Autumn Statement today in the UK Parliament. The Statement comes against a backdrop of falling inflation, higher tax receipts and lower than expected debt figures, giving the Chancellor a little more room for manoeuvre compared with when he delivered his first Budget in March 2023.
From a tax perspective there were two headline-grabbing measures. Firstly, a reduction in the main rate of Class 1 employee National Insurance contributions (NICs) from 12% to 10% from 6 January 2024, with employees benefitting from January onwards. This means the average worker on £35,400 will receive a tax cut in 2024-25 of over £450. However, no mention was made of the government’s plans to tackle fiscal drag, so personal allowances for NICs and income tax are set to remain frozen until 2028, resulting in a significant cost to workers in real terms in what is still forecast to be an environment of higher inflation.
Another highlight of today’s announcement was making the decision to make the full expensing of certain capital expenditure permanent. This measure, which was introduced from April 2021 and previously due to end in March 2026, permits companies to write off the full cost of qualifying plant and machinery in the year of investment.
Notably, there was no mention of inheritance tax cuts which had been the subject of speculation in recent weeks. Presumably the Chancellor is keeping this up his sleeve until the Budget in Spring next year. This might be an indication that more fundamental changes will be proposed ahead of the election – a Trojan Horse for Labour perhaps?
In this special edition of Tax Advisor Update, our team of experts analyse today’s announcements and summarise the most important taxation developments for businesses and individuals.
Full expensing will be made permanent in the Autumn Finance Bill 2023, so that investments made by companies in qualifying plant and machinery will continue to qualify for a 100% first-year allowance for main rate assets, and a 50% first year allowance for special rate (including long life) assets after 1 April 2026. Cars, assets for leasing and second-hand assets will be excluded from these 100% and 50% first-year allowances.
The Chancellor also announced a consultation on the extension of the regime and whether it can encompass leased assets going forward.
This is undoubtedly good news for capital intensive businesses, helping offset the impact of the recent 6% rise in the mainstream rate of corporation tax. Potentially of more interest though was an additional announcement that there is to be a more general technical consultation on wider changes to simplify the UK’s capital allowances legislation.
Despite calls to delay the introduction of a new single R&D regime, the government has pressed ahead with the majority of the previously announced changes. To recap, the existing R&D tax regime operates through two separate reliefs: a super-deduction for small and medium enterprises (SMEs) with losses surrenderable for a cash credit, and a taxable R&D expenditure credit (RDEC) for large companies.
It has now been proposed to merge these schemes so that the majority of companies are entitled to claim an RDEC-type relief at a rate of 20%, subject to corporation tax. There is a minor concession in that the new regime will impact accounting periods starting on/after 1 April 2024, rather than expenditure incurred from 1 April 2024, giving some companies a breathing space.
The separate regime for “R&D intensive” SMEs introduced earlier this year has been retained and still applies for expenditure from 1 April 2023, although now modified by a relaxation of the level at which companies are considered “intensive” for R&D purposes. A provision to prevent companies from bouncing in and out of the R&D-intensive regime has also been announced.
These changes, which apply for accounting periods after 1 April 2024, are welcomed. However, introducing a preferential RDEC rate for intensive SME companies – rather than having an entirely separate regime – would have provided further simplification.
Other measures, including clarification of the rules around which party may claim relief in a subcontract arrangement, as well as the removal of the subsidy rules, show that the government listened to the consultation feedback on the operation of the new single scheme.
The multinational top-up tax and the domestic top-up tax reflect the UK’s adoption of the income inclusion rule and domestic minimum top-up tax rule as part of the OECD/G20’s Global Anti-Base Erosion (GloBE) rules, also known as Pillar 2.
The government had previously legislated for the multinational top-up tax and domestic top-up tax to apply to accounting periods beginning on or after 31 December 2023, whilst recognising that it would need to include a number of additional items to properly deal with evolving guidance, as agreed by the members of the OECD/G20 Inclusive Framework. As a result, approximately 30 changes are being made to the rules to bring them in line with guidance and to deal with specific scenarios and nuances identified by stakeholders. The changes will also apply from the introduction of the rules on 31 December 2023.
The government also confirmed plans to introduce the Undertaxed Profits Rule (UTPR) for periods beginning on or after 31 December 2024. This is often referred to as the ‘backstop rule’ and ensures that the UK keeps pace with other developed economies in implementing the full package of measures.
The government will abolish the ORIP rules in respect of income arising from 31 December 2024. ORIP’s repeal will be legislated for in an upcoming Finance Bill. This makes sense given that the ORIP rules will be largely otiose once the Pillar 2 UTPR is implemented, which will more comprehensively discourage the multinational tax-planning arrangements that ORIP sought to counter.
The Chancellor announced the extension of some business rate relief for certain businesses. The small business multiplier will be frozen for another year, while the 75% relief for retail, hospitality and leisure businesses will be extended for 2024-25. The extension of relief for small business and the retail, hospitality and leisure sector is welcome as some of these industries still face pressures.
A number of new investment zones were announced in Manchester, the Midlands and Wales, focused primarily on advanced manufacturing. Furthermore, the amounts earmarked for the investment zone programme will be doubled to £160 million for each zone, with the scheme extended from the original five years to ten years. Similarly, the period over which tax reliefs are available in freeport zones is to be extended to ten years and will now expire in September 2031.
This will be positive news for all of the designated areas given the SDLT reliefs, enhanced capital allowances and national insurance reliefs that businesses established in such areas are entitled to.
In a measure designed to improve cashflow for SMEs, the government will introduce a requirement that firms bidding for government contracts over £5 million from April 2024 will have to demonstrate they pay their own invoices within an average of 55 days, tightening to 45 days in April 2025, and to 30 days in the coming years.
The government announced moves to abolish Class 2 self-employed NICs. From 6 April 2024, no one will be required to pay Class 2 self-employed NICs. Self-employed individuals with profits above £12,570 are currently required to pay a weekly flat rate of Class 2 NICs to preserve their entitlement to contributory state benefits. The main rate of Class 4 NICs will be reduced from 9% to 8% from 6 April 2024.
The amount raised from Class 2 contributions is relatively small and therefore this is a welcome removal of an unnecessary administrative complexity for the self-employed.
Announced at Spring Budget 2023, the government confirmed that legislation will be included in Autumn Finance Bill 2023 to complete the work to remove the Lifetime Allowance, which used to limit the amount an individual could pay into their pension before they incurred a tax charge. We understand the additional legislation is to clarify certain matters such as the taxation of lump sums and lump sum death benefits.
The government will legislate in the Autumn Finance Bill 2023 to extend the existing sunset clauses for the EIS and VCT from 6 April 2025 to 6 April 2035. This will continue the availability of Income Tax and Capital Gains Tax reliefs for investors in new shares issued before this date by EIS qualifying companies and VCTs.
The government is to urgently introduce a reduction in the main rate of primary Class 1 NICs by two percentage points, from 12% to 10% (for earnings between the Primary Threshold and the Upper Earnings Limit), with effect from 6 January 2024.
This is a significant move which will cost the Exchequer approximately £9 billion per annum. As an example, a nurse on an average salary is expected to be around £520 a year better off because of the measure. However, it does not fully offset the impact of fiscal drag with allowances and thresholds for both income tax and NICs frozen until 2028 during a time of significant inflation.
The UK government has announced a package of measures and potential reform to pensions, with a view to allow pension funds to invest in a more diverse portfolio, providing better returns for savers and supporting a more consolidated pensions market. It confirmed it will push forward with its plans to introduce the multiple default consolidator model for DC schemes, to enable a small number of authorised schemes to act as a consolidator for eligible pension pots under £1,000. In addition, the proposals include a call for evidence to tackle “small pot” pensions, which would allow individuals to have their pension contributions paid into their existing scheme when they change employer.
This should allow employees to maximise their savings, better understand what they have and more effectively manage their retirement funds.
The government will introduce legislation in Autumn Finance Bill 2023 to enable HMRC to reduce the PAYE liability of a deemed employer, where that engagement was incorrectly treated as self-employed for tax purposes. This would account for tax and National Insurance contributions already paid by a worker and their intermediary on payments received from an off-payroll working engagement. The changes will take effect from 6 April 2024.
National Minimum & Living Wage Uprating – From 1 April 2024, the National Living Wage (NLW) will increase by 9.8% to £11.44 an hour for eligible workers across the UK aged 21 and over.
It was a quiet announcement from an indirect taxes perspective. Whilst alcohol duty rates remain frozen until 1 August 2024, most of the other measures included in the announcement related to routine rises in rates of taxes such as the Aggregates Levy, Landfill Tax, Plastic Packaging Tax and Air Passenger Duty, in line with inflation.