Changes in corporation tax rates, SDLT and NIC had been trailed and in some cases already announced, but there were far-reaching tax proposals that we had not expected, such as a substantial repeal of IR 35 legislation.
Businesses, in particular, will need to pay urgent attention to the proposed changes. From a tax burden point of view, the changes represent good news for those who would otherwise have paid the tax. The changes may also have immediate impact on business planning decisions and forecasts. It will necessarily remain to be seen how the tax easements made today will need to be recouped in the future.
As widely trailed, a reversal of the scheduled increase in corporation tax has been confirmed, together with commitments to simplify the tax system. Perhaps counterintuitively, this includes the abolition of the Office of Tax Simplification (OTS). It has to be admitted that outsourcing simplification has not led to the root and branch simplification of the tax system that is desperately needed, although through no fault of the OTS whose remit was far too narrow. This is to be replaced by an internal drive by Government departments.
Key business tax changes
The scheduled increase in corporation tax rates, which would have increased the rate applied to large companies from 19% to 25% from April 2023, has been cancelled. This will be welcome news for many large companies.
After years of tinkering, the Annual Investment Allowance (AIA) will be set permanently at £1 million. It had been due to be reduced next March. The permanence, if such it proves to be, will be welcome incentive for expenditure on plant and machinery, though its generosity will be eaten away by inflation. We would like to have seen the AIA extended to include expenditure qualifying for structure and buildings allowances, potentially to cover all SME capital investment. We await the conclusion of the current consultation later in the year to find out if this is something the Government will consider further.
Untrailed measures included changes to venture capital incentives, tax incentivised share schemes and new Investment Zones.
Start-ups and early growth companies will see a pleasing £100,000 increase to the amount of investment they can raise under the Seed Enterprise Investment Scheme (SEIS), with the gross assets limit lifted to £350,000. You can read more about the changes to the venture capital schemes here.
The limit for options issued under Company Share Option Plans (CSOPs) is doubling to £60,000. In addition, the more interesting and wide-reaching reform is the change in qualifying share conditions. It is intended to make the plans much more flexible. This will lead to many companies amending their schemes accordingly and may lead to an increased uptake in implementing such schemes.
The new Investment Zones build further on the recent Freeport model. These areas will benefit from tax incentives alongside reduced ‘frictions’ such as planning and environmental restrictions to boost growth and jobs in selected areas. We cover the full detail of the Investment Zones here.
Other proposals include changes in employers’ NIC rates and a substantial rethink of the IR35 rules. You can read more on these changes here.
Cancelling the rise in corporation tax rates
The scheduled increase in corporation tax rates, which would have increased the rate applied to large companies from 19% to 25% from April 2023, has been cancelled. The scheduled increase had led some companies to consider accelerating taxable transactions or income recognition, where possible, to before April 2023. There is now no tax-led incentive to do so, and similarly no incentive to defer capital allowance claims or the use of losses in order to obtain a higher rate of tax relief. It is important that companies revisit their quarterly instalment payments and tax cashflow forecasts to realise the benefit of this change as soon as possible.
It will take a little longer for the benefit to flow through to the financial statements. The reversal of the corporation tax increase will need to be substantively enacted for companies to be able to assess their deferred tax position at the lower rate under International Accounting Standards and UK GAAP. For US GAAP, the rate change will only apply to reporting periods that end after enactment of this change. Companies with substantial deferred tax balances should start thinking about the impact of the rate reduction on their financial statements. Substantive enactment is unlikely to happen before 31 December 2022, meaning companies with a September or December year end will need to continue using the higher tax rate when recognising deferred tax for the current financial year. It may be appropriate to make disclosures where the impact is expected to be material.
This change will be welcome news for non-resident landlord companies. Until relatively recently, an offshore company structure was often the obvious choice for non-resident landlords wanting to hold UK residential property. HMRC has progressively introduced new rules that made this type of structure less desirable. The cancellation of the hike in corporation tax will give such structures a welcome respite from steadily increasing taxation and, for some, remove the pressure to restructure before 1 April 2023.
Bank Corporation Tax Surcharge and DPT
The Bank Corporation Tax Surcharge will now remain at the additional 8% rate on profits, continuing the current combined 27% rate of tax. The promised increase in the Surcharge Allowance will still go ahead, increasing from £25 million to £100 million. This boosts the number of profits before the additional 8% applies and will improve the economic environment for the ‘challenger’ banks.
Similarly, the Diverted Profit Tax (“DPT”) rate will also remain unchanged at 25%, staying at 6% above the main rate of corporation tax.
The stamp duty land tax thresholds have also been increased, reducing the SDLT liability for all purchases of a single property in England and Northern Ireland by up to £2,500, with first time buyers able to access up to £11,250 of relief in total. You can read more here.
The Chancellor announced that a new VAT-free shopping scheme will be introduced. Non-UK visitors will be able to obtain a refund of VAT paid on goods purchased on the high street, airports and other departure points, which are subsequently exported from the UK in the shopper’s personal baggage. This scheme is an extended version of the Retail Export Scheme which was withdrawn at the beginning of 2021, but will be administered digitally rather than using paper forms under the previous version.
The scheme will be a boost to the retail sector, especially those that operate in areas popular with overseas tourists. There will first be a consultation period, so it is unlikely that the scheme will be introduced in the near future.
Tax-advantaged Company Share Option Plans (CSOPs)
From 6 April 2023 the flexibility of the CSOP scheme is improved, with:
- The limit on the value of shares over which an employee can hold tax-advantaged CSOP share options will be increased from £30,000 to £60,000; and
- The rules that restrict the grant of CSOP options over a particular class of shares by a company with multiple share classes (the ‘shares worth having’ restrictions) will be relaxed
As yet, details of the proposed amendments to the ‘shares worth having’ restrictions have not been published. It will be interesting to see whether or not these amendments make it easier to grant CSOP options in respect of growth shares. That may be unlikely as other amendments to the CSOP legislation were previously made to prevent CSOP options being granted over growth shares in subsidiaries of listed companies.
The individual employee CSOP limit has been £30,000 since 29 April 1996, so the proposed increase will be greatly welcomed. By comparison, the corresponding limit for the other type of UK tax-advantaged discretionary employee share option, Enterprise Management Incentives (EMI) options is £250,000. The statutory EMI rules are also considerably more flexible than the statutory CSOP rules in various respects.
EMI options, however, can only be granted by SME trading companies or groups, and provided that various excluded trading activities do not make up more than 20% of their overall trading activities. In contrast, CSOP options can be granted by larger companies and groups regardless of their trading activities.
Please speak to your usual adviser or one of the contacts listed if you would like to discuss your tax or financial position.