Business taxation: Energy windfall tax increases to 35% and R&D tax relief changes

The energy windfall tax has been increased to 35%, and a temporary 45% levy introduced on electricity generators, Chancellor Jeremy Hunt announced in his Autumn Statement today. The timeframe over which the windfall tax will apply has also been extended to 2028.  These measures are expected to raise £14bn next year. 

The increase to corporation tax from 19% to 25% from April 2023 will go ahead, as announced by Hunt when he took over as Chancellor, without further changes. There are, however, changes to the R&D regime. 

Nick Cartwright, Business Tax Partner at leading professional services firm Evelyn Partners, said the lack of further changes to the rate of corporation tax will provide some certainty to most businesses after what has been a particularly turbulent few months. 

“Businesses need to be able to plan, and announcements of changes to tax rates or reliefs have an immediate impact on business decisions and forecasts.  Adapting to such announcements, such as by updating forecasts and revising strategic priorities, often represents a real cost to businesses.   

“Although today’s announcements represent some level of stability and certainty, keeping the scheduled increase to corporation tax firmly on the cards will lead some companies to re-consider accelerating taxable transactions or income recognition, where possible, to before April 2023.  There is also an incentive to defer capital allowance claims or the use of losses in order to obtain a higher rate of tax relief.   

“This will need to be balanced with decisions around the £1million Annual Investment Allowance (AIA), which also seems to be here to stay.  The permanence of the increased AIA will incentivise expenditure on plant and machinery, though its generosity will be eaten away by inflation over time.  

“To target abuse and improve compliance, R&D tax relief will be reformed following consutation. From April 2023 the research and expenditure credit rate will increase from 13% to 20%, but the enhanced deduction for SMEs will decrease from 130% to 86% and the payable credit rate will decrease to 10%.  

“Businesses are demanding simplicity and certainty from the tax system.  We have long heard commitments from Chancellors to simplify the tax system, but have not yet seen the root and branch simplification that is desperately needed.  With the proposed abolition of the Office of Tax Simplification the drive for simplicity needs to be taken on seriously by internal Government departments.  

“We hope to see evidence of this at the next Budget - and in the outcome of consultations.”