Spring Budget 2023 - a Hunt for Growth? - AMIF insights

Overview

Set against a backdrop of continued economic, social and political challenges, Spring Budget 2023 contains a number of measures and proposals of particular interest to the AMIF sector. These measures reflect the continued importance of the sector to UK plc, and the government’s intention to invest in its continued growth, following the UK funds review call for evidence and the Edinburgh Reforms proposals.

Particular measures of interest for the AMIF sector include:

Tax rates and allowances

As previously announced, the headline rate of corporation tax will increase to 25% from April 2023 applying to profits over £250,000. The 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 Spring Budget 2023 announced that legislation will be introduced in Spring Finance Bill 2023 to set the main rate at 25% and the small profits rate at 19% for the financial year beginning 1 April 2024 also.

R&D tax credits

The government has confirmed that R&D Expenditure Credit (RDEC) rate will increase from 13% to 20%, the small and medium enterprise additional deduction rate will reduce from 130% to 86%, and the SME payable credit rate (for non-R&D intensive companies) will decrease from 14.5% to 10%. The possibility of merging these schemes is still on the table following the government’s recent consultation which closed on 13 March 2023.

Importantly, the government has also released a ‘Technical Note’ with details of a new R&D scheme for qualifying ‘R&D intensive’ SMEs from 1 April 2023. This is an important and welcome development for many SMEs, following the rate changes announced during the Autumn Statement in 2022 which raised many questions on how the UK remains a competitive location for cutting edge research and innovation. Eligible R&D intensive SMEs will be able to claim an additional higher R&D payable credit rate of 14.5% instead of the 10% credit rate for non R&D intensive companies.

An ‘R&D intensive’ company is a “loss-making SME with an R&D intensity of at least 40%” (meaning that such company incurs at least 40% of its expenditure on R&D). Companies meeting this condition will be able to claim the additional support as part of their claim to SME credit, using the higher rate of credit for any expenditure on or after 1 April 2023, by delaying submission of their claim until the legislation is in place, or by amending their claim once the legislation is in place.

Alongside the above changes, the government announced that it will continue to review how the R&D reliefs are operating, including the possibility of merging the RDEC and SME schemes. The government is due to publish draft legislation on a merged scheme for technical consultation in Summer 2023, along with a summary of responses to the consultation. Any further changes as a part of the ongoing R&D tax reliefs review will be announced at a future fiscal event, including a final decision on whether to merge the RDEC and SME schemes (with possible implementation from April 2024).

Transfer pricing documentation

A further policy paper has been published alongside the Spring Budget 2023 on the changes to the UK’s transfer pricing documentation requirements which will align with the OECD Transfer Pricing Guidelines. This measure will primarily affect businesses operating in the UK, which are part of a large multinational enterprise group that has global revenues of €750m or more and will have effect for accounting periods commencing on or after 1 April 2023 for corporation tax purposes. For income tax purposes it will apply to the 2024/2025 tax year and subsequent years. However, the policy paper contains no substantive update on the government’s earlier announcements. Further information on these can be found in our previous Insight articles (including on the draft primary legislation which was published for technical consultation as part of L-Day 2022 (20 July 2022) as well as on the measure’s secondary legislation which was published for comment on 21 December 2022).

This measure is a reflection of how HMRC will continue to focus on investigating transfer pricing compliance. HMRC employed nearly 400 full-time equivalent staff in 2021/2022 to work on international issues including transfer pricing, and its total transfer pricing yield figure was approximately £1.5bn during that year. The government considers that the new transfer pricing documentation requirements will further enable HMRC to carry out informed risk assessments, target resources more efficiently and reduce the time taken to establish the facts in compliance interventions. Due care should be taken by businesses to comply with the new requirements, particularly given the proposed revisions to the law on the applicability of penalties for failing to do the work necessary to maintain the relevant records or to produce those records on request. In addition, businesses should keep abreast of the ongoing consultation regarding the proposed Summary Audit Trail requirement, which will, if introduced, result in additional compliance obligations.

Genuine diversity of ownership reform

Spring Budget 2023 confirmed that the government would move forward with amendments to the genuine diversity of ownership (GDO) condition to enable the condition to be applied more easily to “multi-vehicle arrangements” such as parallel funds or alternative investment vehicles.

The GDO condition, intended to distinguish “true” funds from more private arrangements and to act as a gateway to particular tax regimes, was originally designed to operate in the context of a single tier open-ended fund structure, but the adoption of the condition in the REIT, non-resident capital gains and qualifying asset holding company rules has demonstrated the condition’s shortcomings when applied to more complicated, often closed-ended, fund arrangements.

The measure, which follows consultation with an industry working group, will enable the GDO condition to be treated as satisfied for the purposes of the REIT, NRCG and QAHC rules, where an entity forms part of multi-vehicle arrangements and the GDO condition is met when considering those arrangements as a whole. This will apply even if the entity itself does not meet the GDO condition, for example if it is made available only to a single investor. Updated GDO guidance is also expected to be published shortly.

Qualifying asset holding company rules

A little less than a year after their introduction, the QAHC rules have seen good take-up in terms of entities applying to benefit from the regime, particularly following clarity on the position of QAHCs in a credit fund and loan origination context. In Spring Budget 2023, the government confirmed further updates to the regime to enable the rules to work as intended.

The proposed updates cover a range of topics, following continued discussion with industry stakeholders on the operation of the rules in practice. Some changes are positive, such as the confirmation that certain entities will still be treated as collective investment schemes which applying the QAHC conditions, despite being bodies corporate. Others will toughen up the gateway into the regime, for example by extending the anti-fragmentation rule to exclude structures involving more than one QAHC in which the combined percentage of relevant interests held by “bad” (i.e. non-category A) investors exceeds 30%. There are also some more esoteric changes, including an amendment to confirm that a securitisation company cannot also be a QAHC, which had been discussed in some corners given that the rules did not contain an obvious tie-breaker.

Overall, it is positive to see that following the introduction of the rules, the government and HMRC continue to invest time and effort in making a success of the QAHC regime, and it is hoped that this approach will continue.

Real Estate Investment Trust rules

The Spring Budget 2023 confirmed that the government will proceed with the updates to the REIT regime announced as part of the Edinburgh Reforms package. These changes represent a further evolution of the regime, following on from proposals discussed in the UK Funds Review call for input issued in January 2021 and subsequent changes enacted in the Finance Act 2022.

The amendments that have now been confirmed include removal of the “minimum three properties” requirement where a REIT holds a single commercial property worth at least £20 million, amending (but not repealing) the three-year development rule to ensure that the valuation used when applying the rule better reflects increases in property values and amending the rules dealing with deduction of tax from property income distributions (PIDs) paid to partnerships. This last change will enable a REIT to pay part of the PID gross, reflecting the interest of partners who would be entitled to gross payment if the partnership had not been interposed, with the balance paid net.

These changes will remove some further friction in the application of the REIT rules, in particular to enable REITs to hold large single commercial properties such as logistics warehouses let to a single tenant, where current HMRC guidance on treating floors of office blocks or units in a shopping mall as separate properties does not assist. Even in the latter cases, the change is positive in clarifying the position in law, rather than placing reliance on guidance and practice.

Carried interest

The government has announced a measure designed to ameliorate the position of UK resident individuals who are taxed on carried interest in both the UK and another country. The paradigm example is a UK resident US citizen. Under current US tax rules, they will be taxed on carried interest based on deemed accruals each year, whereas the UK does not tax them until actual distributions of carried interest.

The UK historically offered a concessionary “credit of last resort” which was set out in HMRC’s published guidance on carried interest, but this was withdrawn in 2022.

The proposed measure will introduce an elective basis of UK taxation for carried interest, under which it will be taxed on an accruals basis. In the above example, it is presumably intended to allow the UK resident to elect to be treated as having paid UK tax on the deemed accruals which are subject to US tax. Whether the UK and US basis of accruals will match up remains to be seen.

Generally, it will be interesting to see how the proposed measure will be drafted. Given that the presumed intention of the measure is to allow UK tax to be credited against the non-UK tax, it will also be interesting to see whether e.g. the US tax rules actually do give credit, or treat the election as giving rise to some kind of non-creditable voluntary payment of tax.

VAT treatment of fund management fees

The government’s consultation on proposed reform of the VAT rules on fund management to improve legal clarity and certainty closed in February 2023. The government has indicated it is considering the responses and continuing to discuss the proposals with interested stakeholders. The government will publish its response to the consultation in the coming months.

VAT review of financial services

The government has announced that, building on the recommendations of the industry working group established to consider the future of VAT and financial services, it will continue working with industry stakeholders to consider possible reforms to simplify the VAT treatment of financial services, reducing inconsistencies and providing businesses with greater clarity and certainty. Given the significant interest in extending zero rating to certain financial services, in particular fund management, it is somewhat disappointing that there is no further clarity on the proposed direction of travel.

Abolition of the lifetime allowance (LTA) and increase in the annual allowance

The LTA was introduced in 2006 and is the maximum amount of tax-privileged pension savings that may be built up in a registered pensions scheme. In broad terms, when benefits come into payment their value is tested against the LTA, and any excess is subject to an LTA tax charge. Up to 5 April 2023 (when the change takes effect), the applicable extra tax charge is 55% for lump sums paid in excess of the LTA and 25% for any excess paid as a pension.

From 6 April 2023, the LTA charge will be removed. Legislation will then follow in a future Finance Act to remove the LTA from pensions tax legislation. However, changes will be made to freeze the level of the tax-free Pension Commencement Lump Sum (PCLS). The maximum amount that most individuals can claim as a PCLS is currently the lower of: (a) 25% of the value of their benefits; or (b) 25% of their available LTA at the time this sum is taken. From 6 April 2023, a PCLS upper monetary cap of £268,275 (25% of the current LTA), will apply. However, those individuals who already have a protected right to take a higher PCLS will continue to be able to do so.

Whilst as set out above, the LTA will be abolished, there still remains an annual limit on the amount of tax privileged pension savings that an individual may build up. This is the Annual Allowance. If there is an excess above the Annual Allowance, a tax charge arises. High earners are subject to a Tapered Annual Allowance.

The government has announced that the Annual Allowance will increase from £40,000 to £60,000. The minimum Tapered Annual Allowance will increase from £4,000 to £10,000. In addition, the adjusted income level required for the Tapered Annual Allowance to apply, increases from £240,000 to £260,000.

The Money Purchase Annual Allowance (MPAA) is a reduction to the Annual Allowance that applies to individuals who have flexibly accessed their money purchase pension savings (but still wish to build up more pension savings). The MPAA will increase from £4,000 to £10,000.

As a result of these announcements, it will be very important that employees likely to be affected by the LTA who are on the cusp of crystallising their benefits, defer doing so until 6 April 2023.

Many employers have put in place alternative cash arrangements and excepted group life arrangements for those affected by the various allowances/limits and these will need to be revisited.

ISAs

The Spring Budget 2023 announced that the adult ISA annual subscription limit for 2023/2024 will remain unchanged at £20,000 and the annual subscription limits for Child Trust Funds and for Junior ISAs for 2023/2024 will remain unchanged at £9,000.

The Spring Budget 2023 also announced that the government will legislate by Statutory Instrument to restrict the eligibility to manage ISA and Child Trust Funds to financial institutions with a UK presence. The change will take effect from April 2024.

Automatic exchange of information powers

The government has announced a technical amendment to primary legislation to consolidate existing powers to allow further Automatic Exchange of Information (AEOI) regulations to be laid under one piece of legislation. The existing AEOI powers to be consolidated are (i) the Common Reporting Standard (CRS), (ii) Country by Country Reporting, (iii) UK DAC 6 (to be replaced by the MDR) and (iv) Reporting Rules for Digital Platforms.

The amendment will lay the groundwork for the UK to fully adopt the OECD’s Mandatory Disclosure Rules (MDR) on 28 March 2023, which govern the mandatory disclosure of CRS avoidance schemes. The MDR requires promoters of such avoidance schemes and service providers involved in their implementation to inform tax authorities of any schemes they put in place for their clients to avoid reporting under the CRS.

The adoption of the MDR is viewed as a continued divergence from EU law following Brexit, providing a lighter framework in the UK to report activities to the tax authorities compared to the EU’s DAC 6. The MDR will replace the existing UK rules in the International Tax Enforcement (Disclosable Arrangements) Regulations 2020, which itself implemented certain hallmarks under Category D of DAC 6 following Brexit. DAC 6 required intermediaries who designed, marketed, organised or made available for implementation or managed the implementation of a reportable cross-border arrangement to report such details to the tax authorities.

The measure will have effect on and after the date of Royal Assent to the Spring Finance Bill 2023.