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2022 Autumn Statement Analysis

In the highly anticipated Autumn Statement today the new UK Chancellor sought to balance the shortfall in public finances through equal savings in spending and increases in tax revenues, including a windfall tax on electricity generators. Given the Government’s own policy constraint of not changing headline rates, further taxes are expected to be raised from tinkering with the existing tax system, adding further layers of complexity.

Chapter 1: Corporate Tax

Chapter 2: Capital Allowances

Chapter 3: Research and Development (‘R&D’) Tax Reliefs

Chapter 4: International Matters

Chapter 5: Employment Taxes

Chapter 6: Investment Zones

Chapter 7: Stamp Taxes

Chapter 8: VAT


Corporation Tax

Corporation Tax Rate
The Chancellor confirmed that the Corporation Tax rate will increase from 19% to 25% from April 2023 for companies and groups with taxable profits exceeding £250,000 per annum, whilst companies and groups with taxable profits below £50,000 per annum will continue to be taxed at 19% and a marginal rate will apply for profits between £50,000 and £250,000, as is currently legislated.

FTI CONSULTING COMMENT:
The 25% rate remains the lowest in the G7 but businesses will undoubtedly now explore options for mitigating the additional cost; there is likely to be increased focus on securing tax deductions for financing costs and capital expenditure, and exploitation of enhanced tax regimes such as land remediation relief, REITs and Qualifying Asset Holding Companies.

As the rate increase has already been enacted in 2021, the rate change will have no impact on deferred tax balances which should have already been restated.

Bank Corporation Tax Surcharge
The rate at which the Surcharge will be charged, has been reduced from 8% to 3% from 1 April 2023. At the same time, the allowance available for banking groups is increased from £25 million to £100 million. This means from April 2023 banks will pay an additional 3% on their profits above £100 million, and so pay a higher combined rate of 28% on those profits.

FTI CONSULTING COMMENT:
This is a reduction from the previous 8% surcharge rate as a consequence of the 6% rise in the main rate of Corporation Tax meaning that banks with over £100m of profits will pay 28% rather than 27%. It reflects the Government’s intent to maintain the UK as an attractive location for financial services whilst preserving the level of tax revenue.

Energy Profits Levy and Electricity Generator Levy
The Energy Profits Levy has been increased by 10%, from 25% to 35%, with effect from 1 January 2023 and extended to the end of March 2028. The investment allowance will be reduced to 29% for all investment expenditure (other than decarbonisation expenditure) broadly maintaining its existing cash value. Decarbonisation expenditure will continue to qualify for the current investment allowance rate of 80%. Additionally, a new temporary 45% Electricity Generator Levy will be applied on extraordinary returns being made by low-carbon UK electricity generation.

FTI CONSULTING COMMENT:
This action was widely expected given the increased societal scrutiny over extraordinary profits being made by energy companies. Furthermore, it is not surprising in light of the Government’s expectation that the Energy Profits Levy shall raise over £40 billion over the next six years.


Capital Allowances

The 100% First Year Allowance for expenditure on electric vehicle charge points has been extended to 31 March 2025 for corporation tax or 5 April 2025 for income tax purposes. As the Corporation Tax rate increase to 25% remains, the Super-Deduction or Special Rate Allowances introduced from 1 April 2021 to 31 March 2023 does not need to be extended and will expire as expected on 31 March 2023.

FTI CONSULTING COMMENT:
Whilst not all taxpayers have benefited from the additional and accelerated relief provided by the Super-Deduction for incentivising investment, it is disappointing this measure has not been extended or new alternative measures introduced. Following the consultation for potential reforms to the capital allowances regime in July and with the UK in a recession, a lack of additional stimulus seems at odds with the Government’s statement that it remains committed to creating the right environment for business investment.


Research and Development (‘R&D’) Tax Reliefs

Changes to the R&D tax regimes were expected and the increase in the R&D expenditure credit (‘RDEC’) came as a welcome surprise. For expenditure on or after 1 April 2023, the RDEC rate will increase from 13% to 20%. The small and medium-sized enterprise (SME) additional deduction will decrease from 130% to 86%, and the SME credit rate will decrease from 14.5% to 10%. The effective return for loss-making SMEs will therefore reduce from 33.4p/£ to 18.6p/£. Now that the rates are much more closely aligned, it is the Government’s intention to consult around potentially merging the two regimes.

FTI CONSULTING COMMENT:
This will make RDEC much more competitive internationally. An increase was anticipated but not to the level of 20% although this was, in part, to mitigate against the rise in the Corporation Tax rate, meaning that the ‘after-tax’ benefit will be 15%. The significant reduction to the SME credit came as a surprise and will be felt hard by many smaller R&D intensive companies. The Government has stated that it plans to consult around cost-neutral ways to provide further support to this group although it is not clear what they have in mind. This change was cited as a mechanism to address the increasing levels of fraud associated with SME claims, but our view is that this is unlikely to have any impact in these activities beyond reducing the level of credit.

Coupled with the recent restrictions to overseas R&D activities, the reduction in the rate will result in the UK SME tax relief falling some way short from being in the top tier of regimes across the international landscape. These measures will inevitably have an impact on investment.

It was also disappointing not to see a response for the call for capital expenditure to be included within the ambit of both regimes.


International Matters

OECD Pillar 2
The Government reaffirmed that they will implement the Income Inclusion Rule (‘IIR’) for accounting periods beginning after 31 December 2023 which is consistent with the position stated in the Consultation Response issued in July 2022 and aligns with the proposed EU implementation date.

However, they have now also confirmed that they will introduce a Qualifying Domestic Minimum Top-up Tax (‘QDMTT’) to ensure that any top-up tax related to UK operations with an effective tax rate of less than 15% will be paid in the UK rather than the ultimate parent jurisdiction of the group. The QDMTT will commence alongside the IIR (i.e. for accounting periods commencing after 31 December 2023) and apply to both multinational groups (as is the case with the IIR) and large wholly domestic groups (which had previously been outside the scope of Pillar 2).

Finally, the Government have confirmed that they intend to implement the Undertaxed Profits Rule (a protectionary measure for where a group is headquartered in a jurisdiction which has not implemented the IIR) but it will apply no earlier than accounting periods commencing on or after 31 December 2024.

FTI CONSULTING COMMENT:
The UK’s continued support for Pillar 2 is not unexpected given Rishi Sunak’s role in the G7 discussions and the subsequent Consultation process / release of draft IIR legislation in July 2022.

Whilst the confirmation of the IIR is not a change from the prior process, the confirmation of a QDMTT (including its extension to large wholly domestic groups) is a significant update as both of these areas were still being considered at the time of the July update. We are supportive of efforts to ensure that top-up tax related to undertaxed UK activities is collected in the UK and therefore, consider the QDMTT an appropriate measure to implement.

Whilst the extension of the QDMTT to large wholly domestic groups does potentially increase taxation on such groups, we consider that it is fair that these groups are not treated differently from multinational groups of a similar size especially in the current economic climate. However, given such groups do not have to deal with the administrative complexity of the main Pillar 2 rules, in our view it is crucial that the QDMTT legislation is designed such that its application to large wholly domestic groups is simpler than the main Pillar 2 rules.

It is not clear whether the Government intends to run a consultation on draft QDMTT legislation (as it has done on the draft IIR legislation) before the inclusion in the Spring Finance Bill 2023 although we hope that this is the case.

Transfer Pricing Documentation
The Autumn Statement confirmed the UK Government’s intention to introduce a requirement for the largest multinational enterprises (‘MNEs’) with a presence in the UK to keep and retain transfer pricing documentation in line with the prescribed format. Whilst the preparation of transfer pricing documentation itself is not new for the largest MNEs, the prescribed format will need to follow the OECD’s Transfer Pricing Guidelines (Master File and Local File) and will take effect for accounting periods starting on or after 1 April 2023. This will be legislated for in the Spring Finance Bill 2023.

FTI CONSULTING COMMENT:
The introduction of this requirement is not unexpected given the draft legislation published in July 2022. The standardised approach may give tax payers more clarity in relation to the preparation of UK transfer pricing documentation. Most of the largest MNE businesses have already implemented the standardised OECD documentation format and therefore this legislation will have minimal impact on those entities. HMRC will continue to consult on a Summary Audit Trail (SAT) which is expected to be published in draft next month.

Diverted Profits Tax (DPT)
From April 2023, the rate of Diverted Profits Tax will increase from 25% to 31%.

FTI CONSULTING COMMENT:
This increase was widely expected in order to maintain the 6% differential above the rate of Corporation Tax which is increasing from 19% to 25% with the intention that it remains an effective deterrent.


Employment Taxes

Most thresholds have been frozen until at least April 2028, using the concept of fiscal drag to bring more income into higher tax brackets. A summary of the announcements is below, and our further detailed comments can be found here: Income Tax, Employment and Share Schemes

Income tax
The threshold at which the additional rate of income tax (currently 45%) begins will be reduced from £150,000 to £125,140 (the point at which the personal allowance is extinguished) from 6 April 2023.

All other thresholds, and all rates of tax, remain unchanged. Thresholds will now be frozen until at least April 2028.

This means that an effective marginal rate of tax of 60% continues to apply on income between £100,000 and £125,140 (due to the restriction of the tax free personal allowance).

FTI CONSULTING COMMENT:
The Chancellor outlined a key principle that “we ask those with more to contribute more”, but it is difficult to apply this policy to a system of marginal tax rates which involves those with income between £100,000 and £125,140 paying an effective tax rate 15 percentage points higher than those with more income. Similarly increased marginal tax rates apply for households with children and earnings above £50,000 where Child Benefit is clawed back.

National Insurance Contributions
The removal of the previous 1.25 percentage point uplift to the rates, which was effective 6 November 2022, remains unchanged and the Health & Social Care Levy will not be re-introduced next year.

The thresholds remain unchanged and will now be frozen until at least April 2028.

FTI CONSULTING COMMENT:
The effect of “fiscal drag” on employers through the freezing of thresholds, particularly when combined with an increased national living wage (for those impacted), will certainly result in employers paying more tax in the coming years.

National Living Wage
The main National Living Wage rate (for those aged 23 and over) will increase to £10.42 from 6 April 2023.

FTI CONSULTING COMMENT:
Employers must fully consider all aspects of their compliance – it is not as straightforward as ensuring that an employee’s contractual pay rate is £10.42 an hour given the many complex intricacies of the legislation.

Capital gains tax
No changes will be made to the rates (currently up to 20%, or up to 28% for residential property and carried interest). However, the tax free annual exempt amount will be cut, from £12,300 to £6,000 from 6 April 2023 and again to £3,000 from 6 April 2024.

FTI CONSULTING COMMENT:
Many speculated that rates of capital gains tax would increase, potentially to the same level as income. This did not happen, and means that promote and carried interest arrangements, as well as most growth share arrangements, will continue to be a key consideration for employers.

Company car taxation
The percentage used to calculate the benefit in kind for electric vehicles (currently 2% of the car’s list price) will increase by 1 percentage point per year between 6 April 2025 and 6 April 2027 (inclusive).

The percentage used for other vehicles will increase by 1 percentage point on 6 April 2025 and then be frozen until at least 5 April 2028.

Share schemes
It was previously announced that companies using the Company Share Option Plan (CSOP) tax advantaged share scheme will, from 6 April 2023, be able to grant qualifying employees options over shares worth £60,000 (double the current limit of £30,000). A technical change to the types of shares over which options can be granted (removing a so-called “worth having” restriction) will also still go ahead.

FTI CONSULTING COMMENT:
With the significant increase, companies who can qualify for CSOP will want to consider whether the generous tax benefits available make it worth setting up a new scheme, or issuing new options under an existing scheme. Those that faced issues due to their share classes may also need to take another look at whether CSOP can now apply.


Investment Zones

On 23 September 2022, the Government announced that it intends to introduce a series of Investment Zones across the UK which will benefit from a series of tax incentives with the aim of driving growth and unlocking housing in these areas. It was announced today that the Government will “refocus the Investment Zones programme”, with further announcements to be made in due course.

FTI CONSULTING COMMENT:
Limited detail on the Investment Zones proposals accompanied the original announcement and the future of the programme remains uncertain following today’s announcement, which suggests that the rollout of Investment Zones may be scaled back.


Stamp Taxes

Stamp Duty Land Tax
On 23 September 2022, the threshold at which Stamp Duty Land Tax (SDLT) must be paid on the purchase of residential properties increased from £125,000 to £250,000.

From the same date, SDLT First Time Buyers’ Relief became available for acquisitions costing up to £625,000 (up from £500,000), with no SDLT payable on the first £425,000 (up from £300,000) of chargeable consideration and 5% payable between £425,000 and £625,000.

It has been announced today that these changes will be reversed from 31 March 2025.

SDLT applies to property in England and Northern Ireland. The threshold at which Land Transaction Tax (LTT) in Wales must be paid on residential properties situated there similarly increased from 10 October 2022, albeit only from £180,000 to £225,000. From the same date, the rate of LTT applicable to acquisitions with purchase consideration of between £225,000 to £400,000 increased from 5% to 6%. It is unclear whether further changes to LTT will be announced by the Welsh Assembly following the Chancellor’s announcement today.

No changes to Land and Buildings Transaction Tax (LBTT) in Scotland were announced in response to the SDLT cuts and it is therefore anticipated that no equivalent LBTT changes will follow the Chancellor’s announcements on SDLT today.

Rates and thresholds for non-residential property are unchanged.

FTI CONSULTING COMMENT:
The SDLT cuts were one of the few measures originally announced by the former Chancellor that survived the reversals announced in October. It is therefore little surprise that these cuts will now also be reversed as the Government seeks to plug a £50 billion deficit – the measure is forecast to raise approximately £4 billion in total between 2025 and 2028 – but the retention until 2025 is intended to support the housing market as the UK enters what is expected to be the longest recession on record.

Annual Tax on Enveloped Dwellings (ATED) – Annual Chargeable Amounts for 2020/21 Chargeable Period
ATED charges increase automatically each year in line with inflation. The ATED charges will rise by 10.1% from 1 April 2023 in line with the September 2022 Consumer Prices Index.

FTI CONSULTING COMMENT:
ATED payable by companies and other “non-natural persons” that own UK residential property valued at more than £500,000, raised a mere £111 million in the 2020-21 tax year and this inflationary increase, is expected to have minimal impact.


VAT

The only VAT measure announced is leaving the VAT registration threshold of £85,000 unchanged until April 2024.

FTI CONSULTING COMMENT:
Historically, the threshold has increased annually to take account of inflation, the current threshold has been in place since April 2017, so the further freeze was not unexpected. It does however, mean many more micro businesses could find themselves having to register for VAT.


And finally …

To quickly recap, following the 2022 Autumn Statement announcements:

  • The current corporation tax rate of 19% will increase to 25% on 1 April 2023 and onwards. This increase had already been enacted under Finance Act 2021.
  • Consequently, the Super-Deduction reliefs on capital allowances will also end on 31 March 2023.
  • Income tax bands and rates for individuals remain unchanged but from 6 April 2023 the additional tax rate of 45% will start at £125,140.
  • The proposed increases in National Insurance Contributions rates and the Health & Social Care Levy from 6 November have been reversed, so will no longer apply.
  • There have been no further changes in the VAT rates.
  • The increase to the nil-rate threshold for all purchasers of residential property has been extended until 31 March 2025.

About FTI Consulting

FTI Consulting is an independent global business advisory firm dedicated to helping organisations manage change, mitigate risk and resolve disputes: financial, legal, operational, political & regulatory, reputational and transactional. FTI Consulting professionals, located in all major business centres throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges and opportunities. The views expressed in any of the articles or other content hosted on this site are those of the author(s) and not necessarily the views of FTI Consulting, its management, its subsidiaries, its affiliates, or its other professionals.

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