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

Overview

Whilst Spring Budget 2023 took place against a backdrop of continuing economic, social and political challenges, many observers were no doubt relieved that it did not immediately trigger the kind of market instability seen in the wake of the September 2022 "fiscal event".  Whilst various measures were announced to support the UK's asset management sector, the banking sector may feel neglected by comparison, perhaps reflecting current Government policy priorities.

Nevertheless, measures of interest for the FI 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.

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 banks' profits above £100 million - this level means that banks 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 Diverted Profits Tax (DPT) will increase from 25% to 31%, in order to retain a 6% differential above the main rate of corporation tax.

OECD Pillar Two

A multinational top-up tax and domestic top-up tax will be introduced for business groups with annual global revenues exceeding EUR 750m (in at least two of the previous four accounting periods) where they are conducting business activities in the UK. These top-up taxes form the first stage of the UK's implementation of the OECD's Pillar Two rules under the Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The objective of Pillar Two is to implement a global minimum level of taxation for corporate entities at an effective rate of 15%.

The multinational top-up tax will target UK parent companies within a multinational enterprise (MNE) group. The top-up tax will be triggered where (i) a UK parent company has an interest in entities overseas in a non-UK jurisdiction and (ii) the UK parent company's group has profits arising in such non-UK jurisdiction that are taxed below 15%.

The domestic top-up tax will target UK companies in either a domestic or MNE group. The top-up tax will be triggered where the group's profits arising in the UK are taxed below 15%. In essence, the UK government considers that if UK companies are to be subject to a top-up tax, the UK Exchequer should be the one to benefit from it.

Certain entities will be excluded from both the multinational top-up tax and domestic top-up tax, such as governmental entities, international organisations, non-profit organisations and pension funds. Investment funds and real estate investment vehicles will also be excluded where such entities are the ultimate parent of the group. The intention is to protect the status of certain investment funds/vehicles as tax neutral entities in order not to deter investment activity, but the exclusion will not extend to all fund arrangements and careful analysis will be required.

The multinational top-up tax and domestic top-up tax are intended to be the UK equivalent of the OECD's Income Inclusion Rule (IIR) and Qualifying Domestic Minimum Top-up Tax (QDMTT) respectively. The new measures do not yet provide for the OECD's Undertaxed Payments Rule (UTPR), which acts as a final resort to catch qualifying MNE groups that have not been subject to the IIR or QDMTT. However, under the UK government's consultation on Pillar Two, it is intended that the UTPR also be implemented in the UK, though most likely at a later date.

The measures will have effect in respect of a qualifying group's accounting periods beginning on or after 31 December 2023.

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.

Corporate interest restriction amendments

Spring Budget 2023 announced a series of technical changes to the Corporate Interest Restriction (CIR) rules, which limit the extent to which large businesses can claim corporation tax deductions for net interest expense above a de minimis threshold of £2 million. This comprises 21 different (generally relatively minor) changes to the details of the CIR rules. They are intended to help ensure the CIR rules operate as intended, reduce unfair outcomes and avoidance, and relieve unnecessary high administrative burdens. The changes generally take effect for accounting periods beginning on or after 1 April 2023, and are not expected to raise any material revenue for the Exchequer.

Double tax relief time limits

The Spring Budget 2023 confirmed the changes to double tax relief time limits announced in the 20 July 2022 Written Ministerial Statement. These prohibit extended time limits for double tax relief claims being claimed from 20 July 2022 onwards in respect of credits for deemed rates of notional non-UK taxes. The changes do not apply to increases in actual non-UK taxes paid (within the last 6 years). Similarly extended time limit claims can still be made in relation to accounting periods which are under appeal or scrutiny. The effect is backdated to the 20 July 2022, the date of the Written Ministerial Statement.

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.

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.