Autumn Statement 2022
Taxes on companies and other businesses
There were few changes announced in the Autumn Statement however, with tax hikes and inflation driving wage inflation, companies will ultimately bear the cost. The reduced R&D tax credit and removal of the capital allowances super-deduction are disappointing but consistent with increased Corporation Tax rates of 25% from 1 April 2023. With consultations on R&D ongoing, more changes will come. There were commitments to support global efforts to counter tax avoidance too.
To discuss what this means for you and your business get in touch or speak to your usual Crowe contact.
Our tax team looks at the measures announced in the 2022 Autumn Statement.
Large corporate tax updates
The government confirmed that a number of previously announced measures aimed at large multinationals will go ahead.
- As part of the Pillar Two implementation to establish a global minimum Corporate Tax rate the government will introduce an Income Inclusion Rule (IIR) and a supplementary Qualified Domestic Minimum Top-up Tax (QDMTT) rule. This will ensure that certain large UK corporates pay a top up tax, where relevant UK and foreign operations have an effective tax rate of less than 15%. This will apply to accounting periods beginning on or after 31 December 2023 and be legislated for in the Spring Finance Bill 2023.
A backstop rule referred to as the Undertaxed Profits Rule (UTPR) will also be introduced to catch relevant arrangements that don’t fall within the primary rules. This will be introduced no earlier than accounting periods beginning on or after 31 December 2024. - The rate of Diverted Profits Tax will be increased from 25% to 31% from April 2023. To keep it 6% above the main rate of Corporation Tax that will increase to 25% from the same date.
- From April 2023, large corporates will be required to maintain Transfer Pricing documentation in a standard format, using the globally known Master File and Local File approach. This will be legislated for in the Spring Finance Bill 2023.
These changes are intended to impact UK operations of large multinational groups with a high level of cross border transactions and presence in many countries, with tech giants being a primary target.
The Organisation for Economic Co-operation and Development (OECD) reforms were designed to target the profits of digital companies and spread the tax receipts more evenly around the world. However, given the current economic environment and many large tech companies forecasting lower profits and losses in some cases, whether this is the right time to hit these large multinationals with additional compliance and tax burdens remains to be seen.
Further details will be released in due course in connection with how these various measures will be implemented as some elements are still under consultation.
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Electricity Generator Levy
A new Electricity Generator Levy (EGL) at a rate of 45% will be levied from 1 January 2023 until 31 March 2028. The levy will apply to extraordinary returns from low carbon energy creation.
The levy affects corporate groups and standalone companies that generate electricity in the UK and are connected to the national grid or local distribution networks. Current publications refer to ‘in scope’ groups and the structure has been designed to cover electricity generation through joint ventures.
The levy will be limited through a de minimis threshold to those groups generating more than 100 Gigawatt-hours (GWh) per year of electricity from ‘in scope’ generation and subject to an allowance of £10 million.
The calculation of the levy will be at group aggregate level and aligned with corporation tax filing. The levy will not be a deductible expense from profits subject to Corporation Tax.
Draft legislation will be published in mid-December which should provide detail on the consideration of ‘in scope’ corporate groups and the impact on joint venture structures within the sector. While the government seeks to support clean and renewable energy generation, the levy could have a significant impact on renewable profitability.
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Inefficiencies of service companies and corporate subsidiaries for professional practice firms
Professional practice firms often have corporate subsidiaries and/or service companies for a myriad of reasons, sometimes merely for historical purposes.
In past years, corporate entities have been efficient for tax purposes. The corporate entity has paid Corporation Tax on its profits at 19% and the net profit has often been distributed up to the parent LLP.
As the LLP is treated as a transparent entity, the dividend is then allocated between partners. In more recent years, individual partners have benefitted from the dividend allowance, currently at £2,000 before paying tax on the dividends in excess of the allowance at the dividend rate, currently at 39.35% for additional rate taxpayers. The combination of the Corporation Tax rate and the dividend allowance has provided partners with an overall tax saving.
However, with the Corporation Tax rate increasing to 25% from 1 April 2023, the efficiency of corporate entities is set to change.
The dividend allowance is being slashed from £2,000 to £1,000 and then to £500 from 6 April 2023 and 6 April 2024 respectively.
With these tax changes looming it is an opportune moment to reflect on the current structure to ensure that the corporate entity continues to serve its purpose and is tax efficient, and whether any changes need to be made.
If firms are thinking about bringing in a corporate entity into their business, time needs to be given to reflect on how tax efficient it is and whether a different structure would in fact work better.
Click here for more information on Taxes for Private Clients.
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Capital Allowances – changes to first year allowances
Following the mini-Budget 2022 announcement that Annual Investment Allowances (AIAs) will be permanently set at £1 million, the Autumn Statement has advised that the super-deduction rules are no longer required and will cease for expenditure beyond 1 April 2023, as originally stated.
First year allowances for electric vehicle charge points have been extended to 31 March 2025 to help incentivise investment in charging infrastructure.
This will affect companies, individuals and partnerships incurring capital expenditure.
The increase of Corporation Tax rate to 25% coincides with the expiry of the first year super-deduction. The 130% and 50% first year Capital Allowances super-deduction rules will cease on 31 March 2023 as originally planned. However, all is not lost, as allocation of expenditure on qualifying assets within the AIA rules can still provide a first year allowance and acceleration of tax relief.
Despite cost increases to electric vehicles, for those installing electric vehicle charge points, they can claim a 100% first year allowance which has been extended to include expenditure incurred until 31 March 2025 for Corporation Tax and 5 April 2025 for Income Tax purposes.
It is imperative that qualifying expenditure is analysed and allocated to super-deduction in the periods to 31 March 2023. Further consideration to the utilisation of AIA (£1 million per year), by allocating qualifying special rate pool assets in the first instance against AIAs, will improve the timing of tax relief.
Analysis and inclusion in tax returns in the year of expenditure incurred is required.
A Treasury-led review has been announced to look further into how energy bills are supported beyond April 2023. The Autumn Statement also said that support for business will be targeted to those most affected and a new approach will better incentivise energy efficiency. As many businesses struggle to comply with green credentials around Environmental Social and Governance (ESG), additional tax incentives on capital expenditure would have been welcomed.
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Changes to R&D tax credits – is this about balancing the books or tackling fraud?
It is positive that the Chancellor sees innovation as key to UK success and pivotal to future growth. The Catapult Network is core to this and it is encouraging that he has committed further investment for them to grow.
He also outlined plans to reduce the R&D tax credit for SMEs from 130% to 86% of qualifying costs and enhance to 20% the credit for companies claiming Research & Development Expenditure Credits (RDEC). SMEs surrendering losses for a repayable credit will receive only 10% of those losses – currently it is 14.5%.
From April 2023, where a company pays 25% Corporation Tax the benefit of claiming RDEC increases by 42%; if they are paying 19% Corporation Tax they will experience a 54% increase in net benefit.
However, an SME paying 25% Corporation Tax will see a 13% reduced benefit and a company subject to 19% Corporation Tax claiming SME relief will experience a 34% reduction in benefit.
The Chancellor is seeking to tackle fraud in the R&D tax credit sector and rebalance the benefit between the two schemes, but the projections also show this will raise around £4.5 billion over five years. So, are R&D companies being used to fund spending elsewhere?
SMEs will continue to claim R&D tax credits. However, with the increase in other costs resulting from inflation this adds further pressure to companies facing a challenging economic outlook.
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