Two key principles underpinned the Chancellor’s tax related announcements: firstly, that those with more should contribute more and, secondly, that the government must avoid tax rises which damage growth. Fiscal drag plays a key role in many of the measures put forward today, with thresholds for various taxes being frozen – some for several years – without increasing the headline tax rates. Combining today’s announcements with the previously announced (cancelled, and then reversed) corporation tax rise from April next year, the UK’s tax burden is said to have reached its highest level in over 70 years.
Corporate & business taxes
R&D tax and audio-visual creative reliefs
In a welcome surprise for large companies, the Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20% for expenditure on or after 1 April 2023. However, in response to reports of fraudulent claims, the Chancellor also announced that the small and medium-sized enterprises (SME) additional deduction will decrease from 130% to 86% and the SME credit rate will decrease from 14.5% to 10%, in both cases for expenditure on or after 1 April 2023. These changes will be legislated for in the Autumn Finance Bill 2022.
Despite the Chancellor’s comments that these changes would not detrimentally impact the levels of R&D investment in the economy, the effect of these changes for SMEs, especially those in the life sciences sector, may be even more significant when combined with the previously announced exclusion of overseas costs from R&D claims (see our summary of the Autumn Budget 2021 here).
Separately, the government also announced a consultation to reform the audio-visual subset of the creative industry tax reliefs (which cover film, animation, video games and children’s and high-end TV).
Online Sales Tax (OST)
In the Autumn Budget 2021, the government announced a consultation process on the introduction of an OST. Today, the Chancellor announced that the government has decided not to introduce an OST, due to concerns around complexity and creating unfair outcomes for different business models. A response to the consultation will be published shortly.
VAT registration and deregistration thresholds frozen
The VAT registration and deregistration thresholds will freeze for a further period of two years from 1 April 2024.
OECD Pillar 2
The government will legislate to implement the globally agreed OECD Pillar 2 framework in the UK which will have an impact on large multinational groups. For more information on this global tax reform, see our article on Implementing the OECD’s two-pillar solution for international taxation.
Today’s announcement confirmed that, for accounting periods beginning on or after 31 December 2023, the government will introduce two rules designed to ensure that large groups headquartered or operating within the UK have an effective tax rate of at least 15%. This will be legislated for in the Spring Finance Bill 2023.
Diverted Profits Tax
It was confirmed that from April 2023 the rate of Diverted Profits Tax will increase from 25% to 31% to ensure this remains a punitive tax rate following the increase in the main rate of Corporation Tax.
Transfer pricing documentation
From April 2023, large multinational businesses operating in the UK will be required to keep and retain transfer pricing documentation in a prescribed and standardised format, set out in the OECD’s Transfer Pricing Guidelines (Master File and Local File). This will be legislated for in Spring Finance Bill 2023.
Personal & employment taxes
Income tax and NICs rates and thresholds
The Chancellor announced that the personal allowance, the higher rate threshold and the national insurance thresholds will be frozen until April 2028 (two years longer than previously announced).
The income tax additional rate threshold (ART) will be lowered from £150,000 to £125,140 from 6 April 2023, meaning that more taxpayers will be subject to the 45% tax rate on their earnings. The ART for non-savings and non-dividend income will apply to taxpayers in England, Wales, and Northern Ireland. The ART for savings and dividend income will apply UK-wide.
Dividend Allowance and Capital Gains tax Annual Exempt Amount
The Chancellor announced that the government will:
- reduce the Dividend Allowance from £2,000 to £1,000 from April 2023, and to £500 from April 2024; and
- reduce the Capital Gains Tax Annual Exempt Amount from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024.
The Inheritance Tax nil rate bands will be frozen for a further 2 years until April 2028.
Real estate taxes
The changes to SDLT announced as part of the September mini-budget (including the increase to the nil rate band and the First Time Buyer’s Relief maximum price increase) will not be permanent but will remain in place until 31 March 2025. See our article on the mini-budget here.
Various announcements were made in relation to business rates, including that a revaluation exercise will go ahead on 1 April 2023 (the first since the last revaluation in 2017). This will be accompanied by transitional relief measures to support rate payers through the bill increases caused by the change in rateable values.
Other notable announcements
The Chancellor also announced various energy related tax measures, including increasing the Energy Profits Levy (the so-called energy windfall tax) by 10% to 35% and introducing a temporary 45% Electricity Generator Levy that will apply to extraordinary returns from low-carbon UK electricity generation.
If you would like further information in relation to any of these measures, please contact a member of our tax team.