Autumn Statement 2022: tax measures

Part 3 of the latest round of fiscal events is not a sequel that many were looking forward to. The sombre mood projected by new Chancellor Jeremy Hunt following the fiasco of September's mini-Budget and resulting market fallout, the carousel of subsequent U turns and the promise of both tax increases and spending cuts against an inflationary and low growth backdrop were not designed to elicit an air of festive cheer - quite the opposite. More Black Thursday than Thanksgiving.

How far we have come since Kwasi Kwarteng announced his Growth Plan on 23 September. Tax cuts were at the forefront of that new economic plan, including the scrapping of the Health and Social Care Levy (and related temporary increase in NICs), abolishing the additional rate of income tax, reversing the increase in corporation tax, widening the zero-rate band of SDLT, rolling back changes to the IR35 system, VAT free shopping and more new investment zones. The market reaction to these unfunded tax cuts and spending pledges (most notably the two year energy price guarantee) led to the resignation of the Chancellor and an emergency statement (which itself had to be brought forward) by new Chancellor Hunt that reversed all but the changes to SDLT, NICs and the Health and Social Care Levy.... with more to come.

Today saw Chancellor Hunt deliver the "more" in the form of his alternative fiscal plan - a plan for economic stability and credibility. Tax increases and spending cuts to fill the so-called black hole in public finances.  

Of course, no Chancellor wants to be seen as tax raising - or at least no Chancellor wants to raise tax rates, particularly where this would run counter to manifesto promises. It is much easier to allow "fiscal drag" to do the hard work and simply adjust tax thresholds - or not adjust them - raising taxes stealthily. And so it was no surprise that the Chancellor decided to extend the current freeze on income tax thresholds (due to end in 2026) by a further two years. At a time of high inflation, this is a particularly effective tax raising measure and is due to yield an extra £12.5bn per annum from 2026. The effectiveness of fiscal drag as a tax raising measure was starkly illustrated by a recent IFS paper, which noted the impact of (now Prime Minister) Rishi Sunak's previous freezing of the personal allowance and higher-rate threshold - originally slated to raise £8bn, it was expected by the IFS to now raise £30bn per year.

Those with the broadest shoulders are to bear the burden of the tax increases according to the Chancellor. And as an example he will no doubt hold up his decision to bring the threshold for the 45% additional rate of tax down to £125,140. In truth, however, the move impacts all higher earners by exactly the same amount - those earning £150,000 will pay exactly the same additional amount of tax as someone earning £5m.

Then there is the extension of previously announced "windfall" taxes and the creation of the new 45% electricity generator levy on excess returns. The government has been extremely reluctant to introduce or extend windfall taxes beyond those introduced by Rishi Sunak in May on oil and gas producers. But the political case for raising some of the much needed additional tax from those that have benefitted from spirally energy prices, including electricity generators, had become overwhelming.

The remainder of the UK's fiscal black hole is to be filled by spending cuts, including a significant scaling back of the cap on energy prices announced by then Prime Minister Liz Truss from April 2023 and lower future increases in spending targets for government departments. In truth, however, much of these spending cuts are delayed beyond the date of the next election - with increased spending in the short term on the NHS and education in particular announced in the short term.

It is readily recognised that Chancellor Hunt had something of a tight-rope to walk with this Autumn Statement. There must be enough fiscal tightening (tax rises and spending cuts) to restore credibility to the UK economy and avert the kind of market reaction that occurred in September, but not so much (or so fast) that it damages the economy in the meantime (beyond the damage already inflicted by other worldwide and domestic factors). Has he succeeded? Perhaps only time will tell - though if polls are to be believed that may not be time that this particular government (and Chancellor) in truth have on their side.

For our accompanying economic analysis of the Autumn Statement, click here.

Business taxes

Corporation tax: As previously announced, the headline rate of corporation tax will increase to 25% from April 2023 applying to profits over £250,000. Finance Act 2021 introduced a small profits rate (SPR) of 19% for companies with profits of £50,000 or less from April 2023. Companies with profits between £50,000 and £250,000 will pay tax at the main rate reduced by a marginal relief providing a gradual increase in the effective corporation tax rate.

The increase in the rate of corporation tax will have knock-on effects for both the diverted profits tax rate and the bank surcharge. From April 2023, the bank surcharge will be an additional 3% rate on their profits above £100 million - this level means that they will continue to pay a higher combined rate of corporation tax than other businesses and a higher rate than they did previously. Also from April 2023, the rate of DPT will increase from 25% to 31%, in order to retain a 6% differential above the main rate of corporation tax.

Annual Investment Allowance: The Autumn Statement confirmed that the government is setting the Annual Investment Allowance (AIA) at a permanent level of £1m from 1 April 2023. However, there was no mention of the broader review of the capital allowances regime launched by former Chancellor Sunak published in May 2022.

OECD Pillar 2: The Autumn Statement also announces that the UK will, as expected, press ahead and introduce the Pillar 2 measures agreed at the G20/OECD. In particular, for accounting periods beginning on or after 31 December 2023, this will require large UK headquartered MNEs to pay a top-up tax where their foreign operations have an effective tax rate of less than 15%. Importantly, the Autumn Statement also confirms that, following consultation, the UK will introduce a supplementary Qualified Domestic Minimum Top-up (QDMTT) tax rule which will require large groups, including those operating exclusively in the UK, to pay a top-up tax where their UK operations have an effective tax rate of less than 15%. Legislation will be included in the in Spring Finance Bill 2023. The announcement also indicates that the government intends to implement the backstop Undertaxed Profits Rule in the UK, but with effect no earlier than accounting periods beginning on or after 31 December 2024, giving some additional breathing space to potential affected businesses.

Transfer pricing documentation: As expected, from April 2023, rules will be introduced to require large MNEs operating in the UK 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 give businesses certainty on the appropriate documentation they need to keep and enable HMRC to effectively identify risks and conduct transfer pricing investigations more efficiently. Legislation will be included in the Spring Finance Bill 2023. However, the initial phase will not include a requirement to produce a Summary Audit Trail. Instead, HMRC will continue to consult on the possible introduction of a Summary Audit Trail requirement (a questionnaire that businesses would be required to complete that covers the main steps undertaken in preparing the Local File) - this reflects concerns expressed over the additional administrative burden that the SAT would create for affected businesses.

R&D tax reliefs: The Chancellor also announced significant reforms to R&D reliefs. In particular, from 1 April 2023, the Research and Development Expenditure Credit (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%. Legislation will be included in the Autumn Finance Bill 2022. In addition, the government will consult on the design of a single scheme, and ahead of the Spring Budget will work with industry to understand whether further support is necessary for R&D intensive SMEs, without significant change to the overall cost for supporting R&D. Previously announced measures to expand qualifying expenditure to include data and cloud costs, refocus support towards innovation in the UK and target abuse and improve compliance will be legislated for in the Spring Finance Bill 2023.

Creative industries tax relief: The government will seek to build upon the success of the audio-visual subset of the creative industry tax reliefs, covering film, animation, high-end TV, children's TV and video games. The government has published a consultation alongside the Autumn Statement on a series of proposals to incentivise the production of culturally British content and support the growth of the audio-visual sectors in the UK.

Windfall taxes: There had been much speculation that the Chancellor would extend the existing windfall tax on oil and gas companies (the Energy Profits Levy) and there are two elements to these measures:

• from 1 January 2023, the EPL rate will rise by 10% to 35%. The investment allowance will be reduced to 29% for all investment expenditure (other than decarbonisation expenditure). Decarbonisation expenditure will continue to qualify for the current investment allowance rate of 80%. The Levy will end on 31 March 2028. With these changes, the EPL is expected to raise over £40bn in total over the next six years.
• the introduction of a new Electricity Generator Levy.  This is a temporary 45% tax that will be levied on extraordinary returns from low-carbon UK electricity generation. For the purposes of the tax, extraordinary returns will be defined as the aggregate revenue that generators make in a period from in-scope generation at an average output price above £75/MWh. The tax will be limited to generators whose in-scope generation output exceeds 100GWh across a period and will only then apply to extraordinary returns exceeding £10m. The tax will apply to extraordinary returns arising from 1 January 2023 and will be legislated for in Spring Finance Bill 2023.

Personal taxes

Income tax: As previously announced, the basic rate of income tax will now remain at 20%. Other rates will remain the same, though the Autumn Statement announced a number of changes to thresholds. The personal allowance and higher rate threshold are already fixed at their current levels until April 2026 and will now be maintained for an additional two years until April 2028. The income tax additional rate threshold will be lowered from £150,000 to £125,140 from 6 April 2023. Can there ever have been quite such a remarkable U turn as abolition to significant increase in less than two months?

The Autumn Statement pledges to "ask everyone to contribute a little, with those on the highest incomes and those making the highest profits paying a larger share" and describes the additional rate tax measure as "steps towards this", suggesting more in the future?

The government will reduce the dividend allowance from £2,000 to £1,000 from April 2023, and to £500 from April 2024. The 1.25% increase in rates of tax on dividends will be maintained (despite the scrapping of the Health and Social Care Levy which was its justification) so that the ordinary rate will continue to be 8.75%, the upper rate 33.75% and the additional rate 39.35% from April 2023.

*NICs: *From July 2022 the NICs Primary Threshold (PT) and Lower Profits Limit (LPL) were increased to align with the personal allowance at £12,570 and will be maintained at this level from April 2023 until April 2028. The Class 2 Lower Profits Threshold (LPT) will also be fixed from April 2023 until April 2028 to align with the LPL. The NICs Upper Earnings Limit (UEL) will remain at £50,270.

The Autumn Statement also announced that the government will fix the level at which employers start to pay Class 1 Secondary NICs for their employees at £9,100 from April 2023 until April 2028.

Capital taxes

Capital gains tax: The government will reduce the CGT annual exempt amount from £12,300 to £6,000 from April 2023 and to £3,000 from April 2024. These measures will raise over £1.2bn a year from April 2025. The government will legislate for these measures in the Autumn Finance Bill 2022.

Despite persistent rumours to the contrary, no changes to the rates of CGT were announced.  There were also no announcements concerning the tax treatment of carried interest.

The government will also address capital gains avoidance. In particular, the government will legislate in Spring Finance Bill 2023 so that shares and securities in a non-UK company acquired in exchange for securities in a UK close company will be deemed to be located in the UK. This will have effect where an individual has a material interest in both the UK and the non-UK company and where the share exchange is carried out on or after 17 November 2022. Draft legislation has been published alongside the Autumn Statement.

IHT: The inheritance tax nil-rate bands are already set at current levels until April 2026 and the Chancellor has announced that they will stay fixed at these levels for a further two years until April 2028. The nil-rate band will continue at £325,000, the residence nil-rate band will continue at £175,000, and the residence nil-rate band taper will continue to start at £2 million.

Stamp duty

On 23 September 2022, the government increased the nil-rate threshold of SDLT from £125,000 to £250,000 for all purchasers of residential property in England and Northern Ireland and increased the nil-rate threshold paid by first-time buyers from £300,000 to £425,000. The maximum purchase price for which First Time Buyers' Relief can be claimed was increased from £500,000 to £625,000. The Chancellor has announced that this will now be a temporary SDLT reduction. The SDLT cut will remain in place until 31 March 2025 to support the housing market. The government then intends to repeal these changes.  

The annual chargeable amounts for the ATED applicable to enveloped dwellings will be uplifted by the September CPI figure of 10.1% for the 2023-24 ATED charging period.

Other announcements

Online sales tax: Following the consultation on an online sales tax (OST) earlier this year, the Autumn Statement has announced that the government has decided not to introduce an OST, an idea put forward by stakeholders in the context of Business Rates reform. The government's decision reflects concerns raised about an OST's complexity and the risk of creating unintended distortion or unfair outcomes between different business models, leaving aside whether such a tax would be permissible given BEPS 2.0.  A response to the OST consultation will be published shortly.

VAT: The VAT registration (£85,000) and deregistration thresholds will not change for a further period of 2 years from 1 April 2024.

Sovereign immunity: HMRC has also released a holding update on its sovereign immunity consultation. The update notes that HMRC continue to carefully consider the feedback received to the consultation, including feedback on high-level policy considerations as well as points of detailed design and implementation including the tax treatment of sovereigns' UK office activities, the use of fund structures as capital gains rollup vehicles, and possible transitional arrangements. HMRC note that it will be for Ministers to decide on how to proceed on this matter and that a formal update will be published in due course. In the meantime, HMRC remains open to discussing issues with stakeholders on a bilateral basis.

Anti-avoidance measures: The Chancellor also announced that the government will seek to put in place a package of measures to tackle tax avoidance, evasion, and wider non-compliance, which will raise an estimated £1.7bn over the next 5 years. However, apart from the specific rules around share exchanges in non-UK companies, no further details were provided.

HMRC: The government has announced further funding for HMRC. It will invest a further £79m over the next five years to enable HMRC to allocate additional staff to tackle more cases of serious tax fraud and address tax compliance risks among wealthy taxpayers.