The UK Chancellor Jeremy Hunt has delivered the much anticipated Autumn Statement 2022 following a period of political and economic instability in the UK. The Autumn Statement comes at a difficult time for the UK economy with inflation at its highest rate for decades, a significantly increased budget deficit forecast and the Bank of England predicting that the UK will be in a prolonged recession. In view of this, the Chancellor has made clear that both spending cuts and increased tax revenues are required to reduce the “fiscal black hole”.
In our latest podcast, London Tax partners Paul Davison and Jill Gatehouse and London Tax senior associate Josh Critchlow discuss the business tax measures they found the most noteworthy in the Autumn Statement. Highlights from the podcast discussion are summarised in this blog post.
Tax rates and stealth taxes
The Chancellor had already confirmed that the corporation tax rate increase to 25% from April 2023 would go ahead as planned. It was confirmed in the Autumn Statement that the planned rate changes to other taxes sitting alongside this increase would go ahead too, namely a decrease in the bank corporation tax surcharge rate from 8% to 3% and an increase in the diverted profits tax (or DPT) rate from 25% to 31%, both with effect from April 2023.
It had been trailed before the Autumn Statement that an element of the tax revenue increases was likely to be in the form of “stealth taxes”. These have materialised primarily in the form of freezing the level of various tax thresholds and allowances, including the income tax personal allowance and higher rate threshold which will both be frozen for an additional two years until April 2028. Importantly for businesses, the threshold for payment of employers’ NICs, which is usually uprated with inflation, is to be frozen for five years – a measure which in itself is expected to raise £5bn per year. Other tax increases appeared in the form of significant reductions in both the dividend allowance and capital gains tax (CGT) annual exempt amount and the lowering of the income tax additional rate threshold from £150,000 to £125,140 from April 2023.
Energy windfall taxes
The Chancellor has listened to calls for the Energy Profits Levy (EPL) – a 25% windfall tax on oil and gas companies enacted in Summer 2022 – to be expanded. It was confirmed in the Autumn Statement that the EPL rate will increase to 35% with effect from 1 January 2023 and that the EPL will remain in place until 31 March 2028 (rather than 31 December 2025 as originally planned). It was also announced that the EPL investment allowance will be scaled back from 80% to 29%, so that, after taking account of the higher tax rate, the cash value of relief from qualifying investment remains the same. Decarbonisation expenditure (which would include, for example, expenditure on installing bespoke wind turbines to power the production installation) will continue to qualify for the current investment allowance rate of 80%.
With these changes, the Government now anticipates the EPL will raise a total over £40bn by 2027/28 and, as such, is a key component in the Chancellor's plans to balance the books. As noted in the podcast, whilst the investment allowance is welcome, the now 75% effective tax rate on oil and gas producers is strikingly high. For affected businesses, some comfort may perhaps be drawn from the promise of a future consultation on the longer-term framework for UK oil and gas taxation.
In addition, UK windfall taxes on energy companies will be taken a step further with the introduction of a new Electricity Generator Levy (EGL) to take effect from 1 January 2023. The EGL is a temporary 45% tax to be levied on so-called extraordinary returns from low-carbon UK electricity generation, defined as the aggregate revenue that generators make in a relevant period from in-scope generation at an average output price above £75/MWh. (For context, this figure is approximately 1.5 times the average price of electricity over the last decade but is still a lot lower than current prices.) The introduction of the EGL is expected to raise over £14bn between 2023 and 2028 and is another key component of the Chancellor’s plans to boost UK tax revenues over the coming years.
The podcast highlights that the EGL is proposed to be a revenues-based tax, without any allowance for costs. The Government’s justification for this approach is seemingly that the targeted electricity generators are benefitting from a significant increase in the price received for their output without a corresponding increase in their costs.
OECD Pillar 2 proposals
It was confirmed in the Autumn Statement that, as expected, the UK will legislate to implement the OECD Pillar 2 proposals. The rules will be implemented in the Spring 2023 Finance Bill with the main Income Inclusion Rule (IIR) coming into force from 31 December 2023. The UK will introduce an Undertaxed Profits Rule (UTPR) – but this legislation will not be included in this Finance Bill and will not be implemented before 31 December 2024 at the earliest.
Finally on Pillar 2, it was also confirmed in the Autumn Statement that the UK will introduce a Qualified Domestic Minimum Top-up (QDMTT) tax. A point to note here is that the intention is for this rule to apply to wholly-UK groups with revenues above EUR750m.
It is highlighted in the podcast that the Autumn Statement explained the UK’s implementation of the Pillar 2 proposals as being aimed at tackling tax avoidance and reinforcing the competitiveness of the UK. On the latter, the benefit for UK-headed groups would be to have a single set of rules to contend with, if otherwise they might face the application of UTPRs in a variety of overseas jurisdictions where they have operations.
The team also considers the expected Exchequer impact of introducing these proposals as well as the likelihood that other key jurisdictions will move forward with implementing these proposals, including the latest thinking on the prospects of US implementation.
For further details on the OECD Pillar 2 proposals, see our dedicated online resources here.
The next Silicon Valley?
The Chancellor’s speech made various references to introducing measures with the ambitious aim of turning the UK into the next Silicon Valley. Although a number of these measures involve regulatory reform rather than tax specific measures, the commitment that the UK should aim for 2.4% of GDP to be invested in R&D was restated and tax incentives have a part to play in achieving this. It was confirmed in the Autumn Statement that the previously announced broadening of categories of expenditure that qualify for Research and Development Expenditure Credit (RDEC) (and R&D credit for SMEs) will go ahead, including – importantly – expenditure on data and cloud costs.
It was also announced that R&D tax reliefs would be rebalanced as between RDEC and the R&D reliefs available to SMEs. In particular, for expenditure incurred on or after 1 April 2023, the RDEC rate will increase from 13% to 20%, whereas the SME additional deduction will decrease from 130% to 86% and the SME credit rate will decrease from 14.5% to 10%. The stated aims of this reform are to address abuse and improve the competitiveness of the RDEC scheme as well as being a step towards a simplified, single RDEC-type scheme on which the Government intends to consult in due course.
It is highlighted in the podcast that, despite the increase in the rate of relief for RDEC and the expanded scope, these changes are anticipated to be revenue raising for the Government.
New share-for-share exchange anti-avoidance measure
In the podcast, the team also discuss the introduction of a new anti-avoidance measure designed to prevent so-called ‘non-doms’ using the share-for-share exchange rules to roll over value accrued in securities in UK close companies into securities in non-UK close companies (noting that any gains or income arising in relation to the new securities would fall outside the scope of income tax and capital gains tax, provided they were not remitted to the UK).
It is recognised that this is a relatively specialised point and of general interest rather than specifically relevant to large businesses, but interestingly this measure is estimated to raise a noteworthy amount of tax: around £830m of the £1.7bn “anti-avoidance” tax revenue referred to in the Autumn Statement policy costings.
Other key tax takeaways
The team also consider a number of other key tax takeaways from the Autumn Statement, including measures not announced (such as the rumoured increases to the rate of CGT and/or the dividend tax rate) and confirmation that the Office for Tax Simplification will be abolished after it has reported on hybrid and distance working later this year.