As may have been expected, no tax saving rabbits were pulled out of the Chancellor's hat in today's Autumn Statement. Instead, there was an expected further freeze of income tax basic and higher rate thresholds, a heavily trailed reduction in the income tax additional rate threshold and reductions to the dividends allowance and capital gains tax exempt amount. However, the biggest revenue raiser are windfall taxes which are estimated now to pull in a staggering over £50 billion by the end of March 2028. A "rebalancing" of the R&D rates was also announced, with a less generous relief for SMEs (to discourage abuse) and a more generous relief for large businesses.
Autumn Statement 2022: key tax measures announced
- Business rates
- Dividend Allowance and Capital Gains Annual Exempt Amount
- Income tax and NICs thresholds
- Investment zones to be refocussed
- New anti-avoidance rule targeting share exchange transactions by non-doms
- OECD Pillar 2
- Online sales tax
- R&D tax relief rates "rebalanced"
- Sunset for SDLT changes
- Windfall taxes
Various measures were announced to reduce the burden of business rates which the government says will provide targeted support worth £13.6 billion over the next 5 years, including:
- freezing the business rate multiplier in 2023-24;
- ensuring that transitional relief relating to next year's revaluations does not come at the expense of those whose property's rateable value decreases; and
- extending and increasing Retail, Hospitality and Leisure Relief.
In addition, the government has confirmed that the previously announced Improvement Relief (to ensure ratepayers do not see an increase in their rates for 12 months as a result of making qualifying improvements) will be introduced from April 2024 and will be available until 2028, at which point the government will review the measure.
The Chancellor has announced reductions in both the Dividend Allowance and the Capital Gains Annual Exempt Amount. These are the annual dividend and chargeable gains thresholds below which no income tax on dividends and no capital gains tax is chargeable. The Dividend Allowance will be reduced in two stages: from £2,000 to £1,000 from April 2023; and then to £500 from April 2024. The CGT Exempt Amount will also be reduced in two stages: from £12,300 to £6,000 from April 2023; and then to £3,000 from April 2024.
The reductions to the Dividend Allowance come hot on the heels of the 1.25% increases in the dividend income tax rates which came into effect in April this year. These changes should be seen as part of the increasing focus on "unearned income" and the perception that it receives favourable tax treatment compared to "earned income" (though the Chancellor was keen to argue that the changes still leave the UK with the most generous allowances in the G7). It is notable, in this context, that the Government has resisted calls for changes to CGT rates.
The Chancellor's announcements in respect of income tax and National Insurance contributions (NICs) were largely as predicted. Although there will be no change to the headline rates of income tax (which will stay at 20%, 40% and 45%), most income tax thresholds will remain at their current levels until April 2028 - two years longer than had previously been announced. The effect of this "fiscal drag" is to bring many more people into the tax system or into higher rates of tax over the coming years as wages rise. In line with the Government's stated ethos that those on the highest income should contribute more to restore public finances, the threshold for paying the 45% rate of tax (currently £150,000) will be lowered from April 2023 to £125,140. This figure reflects the fact that the personal allowance decreases for income over £100,000 (by £1 for every £2 over £100,000) with the result that those earning over £125,140 have no personal allowance and the effective tax rate for earnings between £100,000 and £125,140 is 60%. Following the reversal of the Health and Social Care Levy, on 6 November the rates of employers' and employees' NICs returned to their 2021/22 levels with transitional relief for NICs calculated on an annual basis. In July, the threshold at which employees start paying National Insurance contributions was raised from £9,880 to £12,570 (in line with the income tax personal allowance). Although this was intended to help lower earners with the increase in NICs rates caused by the Health and Social Care Levy, the Chancellor has confirmed that this threshold will be maintained until April 2028. However, there will be no increase in the point at which employers start to pay 13.8% secondary National Insurance contributions which will remain at £9,100 until April 2028. For smaller employers, the Government has pledged to retain the £5,000 employment allowance which, according to the Autumn Statement, will mean that 40% of businesses do not pay NICs.
In September's Mini-Budget the then Chancellor, Kwasi Kwarteng, announced the introduction of a package of measures, including planning liberalisation and generous tax reliefs, to create new investment zones. (For more details of what was announced please see our briefing). However, when, last month, the new Chancellor, Jeremy Hunt, announced that many of the measures contained in the Mini-Budget were being reversed, the fate of investment zones was not entirely clear. Following the Autumn Statement, we now have some more clarity, with the government confirming that they will go ahead but with a different focus. The intention is now that the programme will be used to catalyse a limited number of the highest potential knowledge-intensive growth clusters, including through leveraging local research strengths. The existing expressions of interest are not therefore going to be taken forward, instead the first clusters are to be announced in the coming months.
The government has announced the introduction of a new anti-avoidance rule which will have effect from today (17 November 2022).
Broadly, the measure applies where:
- an individual holds an interest of more than 5% in a UK incorporated "close" company;
- that individual exchanges their shares or debentures in that company for shares or debentures in a non-UK incorporated "close" company in which they also have an interest of more than 5%; and
- the exchange falls within the capital gains tax (CGT) rules for tax neutral share exchanges or schemes of reconstruction involving the issue of securities.
The effect of the measure is to deem the shares in the non-UK company to be situated in the UK for CGT purposes. This means that if the shares are disposed of by a UK resident non-domiciled individual, they will be unable to claim the remittance basis on any resulting chargeable gain on the disposal. The measure therefore prevents non-domiciled individuals rolling gains on UK shares into shares to which the remittance basis applies. In addition, the income tax rules are being amended so that such individuals will generally be unable to claim the remittance basis in relation to dividends and other income paid in respect of interests in the non-UK company.
The legislation gives individuals the option to elect out of its provisions by choosing for the CGT neutrality provisions not to apply to the exchange.
The government costings envisage this measure raising £830m by 2027-28.
The Chancellor has today confirmed that the government will go ahead with its implementation of OECD BEPS Pillar 2, also known in the UK as "multinational top-up tax". This measure is aimed at large multinational corporates, but there are various exclusions, including for investment funds and pension funds. Given that the UK has been a strong advocate of the OECD two pillar corporate tax reform plan, it is not surprising that the government has confirmed the introduction of measures to implement Pillar 2.
The main plank of Pillar 2 is the Global anti-Base Erosion rules that seek to establish a global minimum corporate tax rate of 15% for multinational enterprises that meet a €750m turnover threshold test. A global minimum corporate tax rate will come into effect via two new rules: an income inclusion rule (IIR) and an undertaxed profits rule (UTPR). The IRR can result in tax for a parent entity if one of its subsidiaries is subject to taxes which are considered to be too low (a bit like the UK's existing CFC charge). The UTPR might come into play if a parent entity is in a country that has not implemented the IIR. It works by imposing top up taxes on other group entities that meet certain criteria.
A first draft of the multinational top-up tax legislation (which would implement the IIR into UK law) was published on L day on 20 July 2022. The Autumn Statement stated that the legislation will be included in Spring Finance Bill 2023. It is not clear when the Spring Finance Bill will be published; it is expected that the government will want to have a reasonable period of time to digest and reflect measures agreed between OECD members in the Pillar 2 Implementation Framework, which is due to be finalised by the end of 2022. As previously announced, the legislation implementing the IIR will take effect in relation to accounting periods commencing on or after 31 December 2023.
The Autumn Statement also announced (for the first time) that:
- The UTPR will also be implemented into UK law, but with effect no earlier than in relation to accounting periods beginning on or after 31 December 2024; and
- A qualified domestic minimum top-up tax (QMDTT) will be introduced into UK law and will take effect in relation to accounting periods commencing on or after 31 December 2023. The QMDTT will require large groups to pay a top-up tax where their UK operations have an effective tax rate of less than 15%.
The government confirmed that it will not be introducing an online sales tax (OST). This follows on from a consultation which it ran earlier this year exploring the potential for such a tax as a means of funding a cut in business rates and rebalancing the taxation of the retail sector between online and in-store retail. The government has said that its decision not to introduce an OST reflects concerns raised about its complexity and the risk of creating unintended distortion or unfair outcomes between different business models.
The concerns identified in relation to introducing an OST are certainly valid ones, with the consultation document identifying various difficult distinctions (e.g. would "click and collect" be within scope and how would services be dealt with?). However, it remains to be seen if the government has any other proposals to address the underlying issues for in-store retailers that had led to the OST being considered.
A formal response to the OST consultation is due to be published shortly.
The government first announced its review of R&D tax reliefs in Spring Budget 2021. Since then we've seen the conclusion of a consultation on the topic, as well as the announcement of various reforms designed to: (i) ensure the reliefs stay relevant in the age of data and cloud computing; (ii) focus the reliefs on R&D activity that takes place in the UK; and (iii) tackle abuse. In today's Autumn Statement the government announced further reforms to R&D tax reliefs, again with a focus on discouraging abuse – in particular in the context of the reliefs available to small and medium-sized enterprises (SMEs), which are currently the most generous.
Today the government announced a "rebalancing" of the R&D rates, with the hope that a less generous relief for SMEs will discourage abuse, whereas a more generous relief for large businesses will make the regime more attractive internationally.
The changes (which will be legislated for in the Autumn finance bill, and which will apply to R&D expenditure on or after 1 April 2023) are as follows:
- The Research and Development Expenditure Credit (RDEC) special rate will increase from 13% to 20%. RDEC is available to both large businesses and SMEs which don't qualify for SME R&D tax reliefs.
- The SME additional deduction (or "super deduction") will decrease from 130% to 86%.
- The SME payable tax credit rate will decrease from 14.5% to 10%.
More changes are likely in the pipeline for the R&D tax relief regime, as the government also announced it would consult on creating a single simplified R&D relief that would apply to businesses of all size.
The stamp duty land tax (SDLT) cuts, which were effected in the September 2022 mini budget, will now 'sunset' at the end of March 2025. This means that from the end of March 2025 the nil rate band will revert to £125,000 (£300,000 for first time buyers), and first-time buyers' relief will apply to properties up to £500,000. Now a long stamp duty holiday rather than a permanent cut, it will be interesting to see if this measure will trigger a flurry of activity from buyers seeking to take advantage of the reduced rates, as was seen just before the end of the Covid-19 stamp duty holiday.
In the Autumn Statement, the Chancellor announced that the rate of the Energy Profits Levy, the windfall tax imposed on UK oil and gas extractors in Spring 2022, would be increased from 25% to 35%. The energy profits levy had been due to end at the end of December 2025, but will now stay in force until the end of March 2028.
In addition, the Chancellor announced the introduction of a new and temporary Electricity Generator Levy ("EGL"). The EGL will be imposed on "Exceptional Generation Receipts" ("windfall profits") of UK electricity generator companies and groups at a rate of 45%. The EGL is due to come into force on 1 January 2023 and will be legislated to end on 31 March 2028. Although the rate of the EGL is higher than the energy profits levy, the overall rate of taxation for oil and gas companies will be 75% on all oil and gas profits, whereas the overall rate for electricity generator companies will be 70% from April 2023. This combined 70% rate will only apply to windfall profits that fall within the EGL.
The Treasury has estimated that the EGL will raise £14.2 billion by 2028. This amount will be in addition to the over £40 billion revenue estimate to be raised by the Energy Profits Levy (when the rate rise and extension are factored in).
The EGL will apply to corporate groups (on an aggregate group wide basis where multiple group members are within the scope of the levy) that undertake electricity generation in the UK and are either connected to a national grid or connected to local distribution networks. The EGL will also be applied to groups generating electricity from nuclear, renewable and biomass sources who are benefitting from a significant increase in the price received for their output without a corresponding increase in the costs of generation.
EGL will only apply to windfall profits calculated using a benchmark price per megawatt hour of electricity (£/MWH). The Treasury has stated that the current benchmark £/MWH will be £75. The Treasury considers this to be the average rate above which electricity generation receipts are extraordinary and thus should be subject to the new levy. Further, in calculating their windfall profits, groups will be entitled to an allowance of up to £10m per year which will be deductible from the calculation of the windfalls profits that would otherwise be subject to the levy.
The EGL will not be applied to groups that do not generate more than 100 Gigawatt-hours (GWh) per annum of electricity from in scope generation assets in a "qualifying period" (the accounting period for the company responsible for administering the levy for the group.
The introduction of the EGL might seem to be at odds with the climate friendly measures announced by the UK during COP 27. However, the government has stated that the current energy crisis has resulted in some UK electricity generators realising "extraordinary returns" and that that electricity generators must make an "appropriate contribution" to the substantial cost of support for energy bills.