Anyone following press coverage of the run up to UK Chancellor Jeremy Hunt’s first Autumn Statement would have been forgiven for thinking the end of the world was nigh and that swingeing tax rises were on the way for all. This was in fact “pitch rolling,” the UK Treasury’s careful news and expectations management, designed to avoid the kind of market turbulence which followed his predecessor’s mini-budget.
The immediate economic position is bleak, even though the chancellor announced phased tax and spending changes over the next six years in a way that allowed him to support the economy through the recession predicted for 2023 and 2024.
Businesses in the energy sector face imminent windfall tax increases: oil and gas companies will see their tax bill go up by another 10% from Jan. 1, 2023 (a total of 35% on top of normal corporation tax rates). And electricity generating companies will have to pay a new top-up levy of 45% from Jan. 1, 2023, on electricity sold at prices above £75 ($90) a megawatt-hour (i.e. windfall prices). Although both levies are described as “temporary,” they will run until March 2028. When the main rate of corporation tax goes up to 25% from April 1, 2023, as planned, such companies will be paying total tax on profits of 75% and 70% respectively.
At such rates it seems inevitable that investment decisions for the sector will have to be revisited. Longer term aims have been sacrificed for the sake of short-term tax expediency; for example, investment in renewable energy generation will likely be cut back in the short run but almost certainly will be profitable in the long term. From the energy user’s perspective, despite announcing ongoing support for households through an extended energy price guarantee, there was no substantive news on the energy bill relief scheme that is discounting businesses’ energy costs. Indeed, we won’t find out until next year whether it will continue beyond March 31, 2023.
Banks fared a little better in the Autumn Statement: the current surcharge rate of 8% will reduce to 3% from April 2023, so banks will in future pay tax on profits at a total rate of 28%.
The penal rate of tax on UK companies that divert UK profits to other countries will rise to 31% from April 2023. In addition, the government confirmed that it will be implementing the OECD Pillar Two rules to apply a 15% global minimum tax rate for very large companies in respect of corporate accounting periods beginning on or after Dec. 31, 2023.
Happily, there was better news on business rates. While the planned revaluation exercise will go ahead— from April 1, 2023, rateable values of non-domestic properties in England will be updated to reflect the property market on April 1, 2021—the government will limit the effect of the new valuations for ratepayers facing substantial increases in bills. A set of reliefs, including a freezing of business rates multipliers and percentage caps on annual increases in business rates, will apply until 2025-2026.
Business rates reliefs for the retail, hospitality, and leisure sectors introduced during the pandemic will be extended and increased by 25%. However, all hope of the government introducing a more radical alternative to business rates has now gone—it has finally decided not to introduce a UK-based online sales tax. This is perhaps a recognition that the increasing integration and use of online and traditional bricks-and-mortar sales would create increased complexity for businesses in defining and accounting for online sales.
Research and Development
Rishi Sunak, when chancellor, opted to limit the quantum of tax relief available for research and development expenditure from April 2023 onward by excluding subcontracted overseas costs from UK claims. Before the latest chancellor’s speech there was much debate on further possible restrictions to reliefs. In the event, the outcome was mixed—with more relief becoming available under the R&D expenditure credit (RDEC) scheme for large businesses and some scaling back of relief rates for small and medium-sized enterprise claims.
For UK R&D expenditure on or after April 1, 2023, the RDEC relief rate will increase from 13% to 20%, but the SME additional deduction will decrease from 130% to 86% and the repayable credit for loss-making businesses decreases from 14.5% to 10%. As the rate of corporation tax also rises from April 1, 2023, it is important to understand that the RDEC is an above-the-line credit, so the effective tax benefit rises from 10.5% to 15%, whereas the SME relief is a cost addition, so the effective benefit falls from 24.7% to 21.5% for profitable companies.
Although these measures have attracted criticism from smaller companies, the amendments to R&D relief, along with the chancellor’s promise to protect government funds for science bodies in the UK, represents a strong commitment to innovation funding in the UK and is very welcome for businesses.
Another related announcement saw Kwasi Kwarteng’s proposal to create tax-advantaged “investment zones” across the UK re-imagined as innovation zones that are to be located at new universities in disadvantaged parts of the UK. While this is little more than an idea at this stage, and how well-funded they will be remains to be seen, the concept is rather more focused than the investment zones proposals, which should make it easier for the chancellor to control the costs to the exchequer. The concept is based on similar hubs that exist around prestige universities, so perhaps has a better chance of fostering successful spin-out businesses.
The government also launched a consultation on its proposed reforms to audio-visual tax reliefs, which represent five of the UK’s eight current creative industry tax relief schemes, to “ensure that they remain world-leading.” Key proposals under consultation include merging the current film and TV reliefs into a single tax credit scheme, making tax relief for schemes above the line (like RDEC) but including repayable expenditure credits, increasing the minimum expenditure threshold and introducing a UK expenditure requirement. Brexit will allow this to replace the current European expenditure requirement.
Cost control will be a key focus for businesses. When commercially sensible, it makes sense to maximize reliefs; for example, if new plant and machinery is needed in the short term, investments made before March 31, 2023, will benefit from the capital allowances super deduction. Equally, the UK patent box scheme still offers an effective 10% rate of tax on patent derived profits, so continuing R&D investment, and patenting successes, looks like a highly valuable strategy for a business.
For businesses in the services sector, the Autumn Statement contained very little good news—they will have to manage rising costs while inflation is high and probably beyond that—at least in relation to employees. As well as announcing increases in the national minimum wage that keep pace with the current high rate of inflation, the government is freezing current thresholds for national insurance contributions (NICs). Therefore, while employers will likely have to agree to wage rises each year to retain their employees, every year will see them paying more in NICs (until at least 2028), as the secondary threshold (the weekly/monthly amount of pay at which employers start to pay NICs) will be frozen.
Controlling staff costs while retaining a motivated team will definitely be a challenge, so businesses should make sure they use all the tools available to them, from employee share schemes to electric vehicles and other tax-advantaged benefits in kind, to achieve their goals.
The Verdict from Businesses
Few will be happy but, allowing for Hunt’s very short time in office, the Autumn Statement announcements were critical in stabilizing the economy. This damage limitation was largely achieved, judging by the relatively calm response from financial markets. The chancellor’s next decisions will be every bit as challenging; by the time we have a full budget in spring 2023, businesses and financial markets will be looking for a road map back to realistic levels of growth and a fiscal policy to enable them to invest with confidence.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Paul Falvey is a tax partner at BDO LLP.
The author may be contacted at [email protected]