2023 Autumn Statement

The UK Chancellor’s Autumn Statement Announced Several Measures To Cut Tax and Reward Work

On 22 November, the UK Chancellor announced the 2023 Autumn Statement that aims to further stimulate economic recovery, with a broad range of initiatives to support private sector growth through tax cuts for businesses and for both employed and self-employed individuals. The flagship policy announced by the Chancellor is to make “full expensing” on capital allowances a permanent regime.

Key tax policy developments have been announced for companies and individuals, including:

  • “Full expensing” to be made permanent for qualifying capital expenditure. This was originally intended to be temporary until 31 March 2026;
  • Launching a consultation to extend “full expensing” to leasing;
  • A combined measure on research and development (“R&D”) for small and midsize enterprises (“SMEs”) and larger businesses;
  • Abolition of Class 2 National Insurance Contributions (“NICs”) and reduction of the main rate of Class 4 NICs to 8% for self-employed individuals;
  • Reducing the main rate of Class 1 primary NICs from 12% to 10% from 6 January 2024; and
  • Increase of the National Living and National Minimum Wages.

Our views on the key tax developments are below.

Employment Tax and Reward

Reduction in Employee National Insurance Contributions (“NICs”) The Chancellor announced a reduction...

Reduction in Employee National Insurance Contributions (“NICs”)

The Chancellor announced a reduction in the main rate of Class 1 primary NICs (the contributions paid by employees) from 12% to 10%, to be implemented with effect from 6 January 2024. There is no change to the rate paid on earnings above the “Upper Threshold” by higher earners, which remains at 2%, nor to employer Class 1 secondary NICs. Effective marginal tax rates for employees, including NICs, will broadly be 30% (basic rate), 42% (higher rate), and 47% (additional rate).

FTI CONSULTING COMMENT:

All employees who pay Class 1 NICs (i.e., the vast majority) will see a reduction in their tax bill due to this measure. However, had the Chancellor instead raised the threshold from which Class 1 primary NICs are due in line with inflation, it is likely that most employees would be even better-off. Therefore, this is not quite as generous as it appears because of “fiscal drag” (although the government, somewhat disingenuously, highlighted that effectively since 2010 the thresholds have increased by more than inflation).

Employers saw no change to the Class 1 secondary NICs they pay on their wage bill (broadly 13.8% plus, for larger employers, an additional 0.5% apprenticeship levy). Given the increase in minimum wage rates, and high inflationary pressures, many employers will be disappointed that any “tax giveaway” in respect of employment was solely for employees and not shared with them to help grow their workforce.

Whilst ensuring that employees feel any benefit quickly, by introducing this measure from January 2024, employers will need to be agile to implement this change in time and there is likely to be added complexity where annual rates are used for NICs (such as in the case of company directors, for correction of misreported earnings, and for certain “Modified National Insurance Schemes” used for internationally mobile employees).

Reduction in NICs for Self-Employed Individuals

The Chancellor has abolished Class 2 NICs, the flat rate weekly NICs paid by most self-employed individuals (currently £3.45 per week).

In addition, the Class 4 NICs rate, the national insurance contributions paid by most self-employed individuals as a percentage of their business income, will be reduced from 9% to 8%. The rate paid for profits above the “Upper Threshold” remains unchanged at 2%.

FTI CONSULTING COMMENT:

A reduction in the amount of NICs paid by the self-employed is likely to be welcomed by those individuals. However, it is worth noting that because of “fiscal drag” it is likely that most self-employed individuals would have been better-off had the NICs thresholds been uprated by inflation.

In addition, this widens the potential total tax burden between being self-employed and employed. Individuals may seek to argue they are self-employed when they should be taxed as employees, which could lead to an increase in fraud in the tax system.

Finally, for globally mobile employees who are no longer subject to Class 1 NICs whilst working abroad, Class 2 NICs were often a relatively cheap way to make voluntary contributions and to continue to be eligible for various state benefits. Depending on how the abolition of Class 2 NICs is implemented this opportunity is likely to end, with the higher rate of Class 3 NICs to be paid in these cases (currently at £17.45 per week).

Consultation on “One Pension Pot for Life” Announced

The Chancellor announced a consultation that will cover the ability for employees to have a legal right to require their employer to contribute directly into the employee’s existing pension scheme, rather than into a pension scheme of the employer’s choosing (and therefore creating a single pension pot ‘for life’). This could be a fundamental change to the way employers contribute to employees’ pensions.

FTI CONSULTING COMMENT:

Whilst this may increase the administrative burden on employers, it is hoped that a similar process to the standard BACS process for employee wage payments could be used. This measure, if implemented, is likely to be welcomed by many employees, especially those who already take an active interest in managing their pension savings or who change jobs frequently (and, therefore, who could end up with many segregated pots). It is established that the current pension savings of many employees is far below what will be needed for the future – hopefully this measure, if enacted, could go some way to change this position.

Increase to Minimum Wages

Just prior to the Autumn Statement, the government confirmed that the National Living Wage, applying to those aged 21 and above, will increase from £10.42 to £11.44 with even larger increases to the minimum wage for apprentices and those aged between 16 and 20 (inclusive).

FTI CONSULTING COMMENT:

An increase to the National Living Wage and National Minimum Wage is expected to further HMRC’s continued focus on compliance. As always, the annual increase provides employers a good opportunity to review their policies and practices to ensure they are meeting all requirements of the (often very complex) minimum wage legislation which can cause inadvertent underpayments.

Off-Payroll Working (IR35) – Offset of Contractor’s Income Tax and NICs

New legislation will be introduced to help reduce potential employer PAYE liabilities where an engagement falls within the off-payroll working rules (i.e., akin to employment for tax purposes) but was incorrectly treated as outside the rules (i.e., akin to self-employment for tax purposes) by an end-user, in cases where the contractor has already paid income tax or NICs.

FTI CONSULTING COMMENT:

This legislation should provide a helpful, and economically just resolution for the current unfair position whereby effective double tax could be due from an employer, even where a contractor had already paid income tax and NICs themselves. The detail of how this may work administratively will be important.

Outcome of Construction Industry Scheme Consultation

Immediately following the Autumn Statement, HMRC released a summary of responses to the recent Construction Industry Scheme (“CIS”) reform consultation. This includes next steps on drafting legislation that will (1) remove most landlord to tenant payments from the CIS; (2) include VAT compliance when determining if “gross payment status” is appropriate for sub-contractors; and (3) increase the ways in which “gross payment status” can be immediately removed for sub-contractors engaging in tax fraud.

These changes will come into effect from 6 April 2024.

FTI CONSULTING COMMENT:

Payments between landlords and tenants can often present tricky problems for the purposes of the CIS, often causing confusion and creating potentially large liabilities. The impacted sectors have long asked for reform in this area and will be very glad to see this being implemented. As always, the details of exactly what payments can be excluded from the CIS will be of vital importance.

Further Money for HMRC Compliance Activities

The Chancellor announced further resources for HMRC to help combat underpayment of tax, expected to raise a total of £5 billion over the next five years. It is expected that all areas will see potential increased compliance checks, including employers.

FTI CONSULTING COMMENT:

During the height of the COVID-19 pandemic, many of the HMRC staff dealing with employment taxes were re-assigned. During the past 12 months we have seen an increase in HMRC compliance activities for employers and only expect this to continue. All employers, but especially those who have not had an employer compliance check within the last four to six years, should review their current practices across all elements of employment tax, ensuring that they are compliant and that their processes help prove they are low risk and have taken reasonable care.

Corporation Tax

Capital Allowances At the 2023 Spring Budget, the government introduced “full expensing” enabling...

Capital Allowances

At the 2023 Spring Budget, the government introduced “full expensing” enabling companies to claim a 100% first-year allowance for expenditure incurred between 1 April 2023 and 31 March 2026 on main rate plant and machinery, and a 50% first-year allowance for special rate plant and machinery. As was widely expected, the Chancellor today announced that this temporary measure would be made permanent, meaning qualifying expenditure will continue to qualify for the 100% and 50% first-year allowances (“FYA”) after March 2026.

Expenditure on cars, assets for leasing and second-hand assets is currently excluded from this accelerated relief. However, the Chancellor today announced that a consultation will be launched on extending FYA to assets for leasing.

FTI CONSULTING COMMENT:

Making the full expensing regime permanent is welcomed, bringing about the certainty that businesses have been seeking to support making investment decisions in the medium to longer term. The changes will be of particular interest for real estate and large infrastructure assets which typically take several years to construct, providing sufficient profits are generated to utilise the relief. The changes continue to be of less benefit to loss-making businesses who may not be able to unlock the much-needed cashflow provided by the accelerated timing provided by the relief.

It will be interesting to see if the results of the consultation to expand FYA to assets used for leasing determine there is sufficient value and appetite for the regime to be expanded.

OECD Pillar 2

As part of the ongoing implementation of Pillar 2 into UK law, a number of technical amendments (some of which had previously been announced) are being made to the Multinational Top-up Tax and Domestic Top-up Tax legislation through the Autumn Finance Bill 2023, to ensure it remains consistent with the most recent OECD developments on Safe Harbours and Administrative Framework. In addition, it has been confirmed that the Undertaxed Profits Rule will be introduced in the UK for accounting periods beginning on or after 31 December 2024.

FTI CONSULTING COMMENT:

Whilst the Top-up Tax legislation will still become effective for accounting periods beginning on or after 31 December 2023, the extensive number of amendments necessary to ensure that UK legislation remains consistent with the OECD agreed position reiterates the fact that the provisions are complex and continually evolving, resulting in a severe compliance burden for taxpayers. In addition, the confirmation that the Undertaxed Payments Rule (“UTPR”) will be effective at the end of 2024 adds to the compliance burden for certain taxpayers as they will have to prepare for the application of this rule at the same time of their first year of applying the UK Multinational Top-up Tax and Domestic Top-up Tax rules.

Offshore Receipts in Respect of Intangible Property (“ORIP”)

The government has announced that they will repeal the ORIP legislation in respect of income arising after 31 December 2024. The rationale behind the repeal is that the implementation of Pillar 2 (in particular the UTPR) should more comprehensively discourage the tax planning arrangements that ORIP sought to counter.

FTI CONSULTING COMMENT:

Given that the application of the ORIP rules were complicated and highly subjective, the repeal of these provisions is welcomed as it should reduce the compliance burden on taxpayers. In particular, this measure will be welcomed by taxpayers outside of Pillar 2 as they should benefit from an overall reduction in their tax compliance obligations.

R&D Tax Relief

There were two expected updates provided in the Autumn Statement 2023 in relation to the future of the R&D tax regimes, including the future merging of the SME and R&D Expenditure Credit (“RDEC”) schemes and enhanced support for loss-making SMEs where they are “research intensive.”

The single merged scheme is to be an above-the-line credit that will allow claimants to claim for contracted out R&D whilst incorporating the PAYE and NIC cap from the SME regime, and restricting the ability to bring in R&D carried out overseas. The rate of benefit under the new scheme will be 20%, whilst the notional tax rate applied to loss-makers in the merged scheme will be the small profits rate of 19%, rather than the 25% main rate set in the current RDEC. It was also announced that a restriction for subsidies will not be a feature of the new regime, meaning that companies in receipt of grants, or other forms of subsidy, will not have their entitlement to relief reduced. The new merged regime will take effect in relation to accounting periods beginning on or after 1 April 2024.

The enhanced support for SMEs, as already announced, allows loss-making SMEs to claim the repayable credit at the higher 14.5% rate rather than at 10% where they are “research intensive”. To qualify as a “research intensive” company the R&D expenditure must constitute at least 40% (for expenditure incurred on or after 1 April 2023) or 30% (for accounting periods beginning on or after 1 April 2024) of total expenditure. In addition, there will be a year of grace where a company falls below the 30% threshold.

There was also an announcement that advances the ongoing work being undertaken to tackle abuse in the system with a new measure removing the ability for nominees to receive repayable credits and a restriction on assignments of repayable credits.

FTI CONSULTING COMMENT:

There is a lot to be pleased about in the latest announcements concerning both the merged regime and the enhanced support for loss-making SMEs. There have been questions as to whether the merged scheme was going to go ahead on the expected timeline with some asking for it to be delayed, but it has now been confirmed that it will come in from next year. The removal of the restriction for subsidised expenditure from the merged and “research intensive” regime represents a significant simplification allowing for a much more coherent framework for the rules.

The announcement in relation to the definition of a “research intensive” company will also be welcomed given that for accounting periods beginning on or after 1 April 2024, only 30% of their expenditure will have to be on R&D where it had previously been announced that it would be at 40%.

The anti-abuse measure of prohibiting claimant companies to have repayable credits paid to nominees is a positive move in the ongoing fight against abuse across the R&D tax credit regimes. HMRC will withhold payment until it is able to make payment directly to the claimant company where necessary. HMRC have stated that while most nominations are not associated with fraud, a high proportion of fraudulent or fraud-adjacent claims use nominee bank accounts. This change will take effect for all claims made on or after 1 April 2024.

Assignments, whilst not a feature used extensively in R&D tax credits, allow a third party a property right over a payment. This restriction is effective from the date of the 2023 Autumn Statement.

Other

Real Estate Investment Trusts (“REITs”) As part of the ongoing UK funds review, it has been confirmed...

Real Estate Investment Trusts (“REITs”)

As part of the ongoing UK funds review, it has been confirmed that a series of further changes to the UK REIT regime will be enacted in the Autumn Finance Bill 2023. The changes are as follows:

  • The condition that the REIT principal company must not be a close company or only be a close company because it has one or more institutional investors as participators is to be refined. Legislation will be introduced that makes it clear that it is possible to trace through intermediate holding companies where an institutional investor is the ultimate beneficial owner. In addition, the definition of “institutional investor” will be amended so as to require authorised unit trusts, open-ended investment companies and collective investments scheme limited partnerships to meet a genuine diversity of ownership (“GDO”) condition or non-close condition and enable long-term insurance businesses to qualify;
  • Co-ownership Authorised Contractual Schemes (“CoACS”) that meet a GDO condition or non-close condition will be added to the list of entities regarded as institutional investors;
  • The rule allowing REITs to hold a single commercial property is to be amended to ensure the condition works as intended;
  • The exemption for gains on disposals of interests in UK property rich companies is to be expanded to include gains realised on disposals of interests in UK property rich CoACS;
  • Insurance companies will be able to hold an interest of 75% or more in a group REIT for the first time;
  • The profit to financing cost ratio legislation will be amended to make it clear that the definition of “property financing costs” means financing costs which are referable to the UK property rental business. Certain amounts in respect of which a deduction is denied for corporation tax purposes will also be excluded from the definition of property financing costs;
  • The “holders of excessive rights” legislation will be amended to prevent investors being regarded as such where they are not taxed or taxed at a lower rate under the terms of an applicable double tax treaty on distributions from a REIT; and
  • Legislation currently provides for a disregard of the REIT exemption for direct disposals of assets in computing the corporate interest restriction. This disregard will be extended to the REIT exemption for disposals of rights or interests in UK property rich companies.

FTI CONSULTING COMMENT:

There have been a number of relaxations to the UK REIT regime in recent years in consequence of the ongoing UK funds review. The changes have been warmly received by REITs and their investors alike, and led to a number of new entrants electing into the regime. The latest changes are expected to further increase the take-up of the regime, and encourage investment from investors that were previously precluded from doing so. It will be particularly interesting to see whether insurance companies choose to direct investments into REITs.

However, with an election on the horizon, which is expected to coincide with the end of the UK funds review, these may be the last changes to the REIT regime for the foreseeable future and it is disappointing to see that additional measures to facilitate investment in renewables by REITs did not make the package.

Freeports and Investment Zones

As well as announcing the introduction of new investment zones, the Chancellor announced that the window in which to claim tax reliefs for freeports and investment zones is to be extended from five years to ten years. The tax incentives include enhanced capital allowances, Stamp Duty Land Tax relief, Employer NICs relief and 100% business rates relief.

FTI CONSULTING COMMENT:

The establishment of freeports and investment zones was designed to encourage investment and growth in areas deemed in need of support. There is thus far limited evidence that the desired result has been achieved and therefore an extension to the existing tax reliefs, rather than a broadening of their scope, may not improve matters.

Electricity Generator Levy

The government is to introduce a new investment exemption from the Electricity Generator Levy (“EGL”), which is a 45% charge on receipts generated from the production of wholesale electricity that applies from 1 January 2023 to 31 March 2028. The exemption will mean that receipts from a new or expanded electricity generation station will not be subject to the EGL where a substantive decision to proceed with a project to create a new or expanded station is made on or after 22 November 2023.

FTI CONSULTING COMMENT:

This measure will be welcomed by electricity producers and should remove some of the disincentive to investment in electricity generating assets that was created when the EGL was introduced at the beginning of the year, thus supporting investment in renewable energy generation.

Annual Tax on Enveloped Dwellings (“ATED”)

The ATED, which is payable by corporate and other “non-natural” owners of UK residential property valued at over £500,000, annual chargeable amounts will be increased in line with September Retail Price Index (“RPI”) (6.7%) for 2024-2025.

FTI CONSULTING COMMENT:

This inflationary increase has incurred every year since the ATED was introduced in 2013 and was therefore anticipated. The ATED is payable by a limited number of taxpayers and therefore this increase is not expected to have a material impact.

Plastic Packaging Tax (“PPT”)

The government is monitoring the thresholds relevant to the chargeability of UK PPT suggesting that the application of the tax could be expanded in future, reflecting the importance for UK businesses to focus on their impact on the environment to avoid facing higher taxes. The CPI rate increase is in line with expectations.

FTI CONSULTING COMMENT:

The government is monitoring the thresholds relevant to the chargeability of UK PPT suggesting that the application of the tax could be expanded in future, reflecting the importance for UK businesses to focus on their impact on the environment to avoid facing higher taxes. The CPI rate increase is in line with expectations.

Sign up to get access to FTI Consulting Insights

Subscribe