Company Taxation

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 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 Diverted Profits Tax (DPT) will increase from 25% to 31%, in order to retain a 6% differential above the main rate of corporation tax.

For a table of the main tax rates and allowances for 2023/2024, click here.

Investment zones

New measures will enable Investment Zones to be designated and recognised in law as geographical areas where businesses can benefit from tax and NICs reliefs. The intention is to incentivise investment in Investment Zones, in part, through tax reliefs and reducing the cost of hiring employees.

Section 113 Finance Act 2021 currently allows HM Treasury to designate Freeport tax sites (a product of then Chancellor Rishi Sunak) which can provide a range of tax reliefs for businesses such as enhanced capital allowances, enhanced structures and buildings allowances and employer NICs relief. The new measures will extend these existing tax and NICs reliefs to special tax sites in or connected with Investment Zones.

Investment Zones were previously announced under the former Chancellor Kwasi Kwarteng’s package of measures in the now largely defunct Growth Plan 2022. The specific tax incentives were tabled but never finalised. The current proposals for Investment Zones appear to align much more closely to the existing tax reliefs in Freeports, and suggest Chancellor Jeremy Hunt is taking a more cautious approach than his predecessor on his interpretation of Investment Zones. Nevertheless, given the relatively optimistic forecasts by the Office of Budget Responsibility since the Autumn Statement 2022, the “re-focus” on Investment Zones as a headline measure of the Spring Budget 2023 will likely be hailed by the Chancellor as a shift away from pragmatic cost-saving measures and towards a growth-oriented fiscal strategy.

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

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.

Capital allowances: full expensing

The Spring Budget 2023 introduces a new temporary form of capital allowances for plant and machinery in an attempt to drive business growth in the UK, termed “full expensing”.

Capital allowances are a tax relief for businesses that allow companies to deduct some, or all, of the cost of a capital item from their profits before paying tax. Various forms of capital allowances are already available in the UK which allow businesses to claim different amounts. These include annual investment allowances, writing down allowances, first-year allowances and structure and buildings allowances. If an item qualifies for more than one type of capital allowance, businesses can choose which one to use. They can claim 18% tax relief per accounting period on all plant and machinery they buy which falls under the “main rate” pool, unless the items are required to be allocated to the “special rate” pool, or “single asset” pool.

Where full expensing is claimed, companies will be able to claim 100% capital allowances on qualifying plant and machinery in the first accounting period. This allows companies to write off the cost of investment in one go, rather than spreading it across a number of years. For every pound that a company invests, their taxes will be cut by up to 25p. For the full expensing to apply, companies must be subject to corporation tax; expenditure must be incurred on the provision of “main rate” plant or machinery; it must be claimed on plant and machinery which is new and unused; and full expensing cannot be claimed on cars, or items given to the company as a gift, or bought to lease to someone else.

Plant and machinery that may qualify for full expensing includes machines such as computers and printers; office equipment such as desks and chairs; vehicles such as vans, lorries and tractors; warehousing equipment such as forklift trucks, pallet trucks, shelving and stackers; tools such as ladders and drills; construction equipment such as excavators, compactors and bulldozers; some fixtures such as kitchen and bathroom fittings; and fire alarm systems in non-residential properties.

Special rules will apply when a company sells an asset on which it has claimed full expensing, and companies will be required to bring in an immediate balancing charge equal to 100% of the disposal value. In other words, if the company sold an asset for £10,000 on which they had claimed full expensing, they would be required to increase their taxable profits by £10,000.

Full expensing will be available for expenditure incurred on or after 1 April 2023 until, initially, 31 March 2026 – though the Chancellor announced the ambition to make this change permanent. The temporary extension of allowances is in line with the UK’s policy goal of promoting investment in UK businesses. It aims to build on the success of the 130% super-deduction, and follows a capital allowances consultation last year in which businesses showed a clear preference for full expensing over the other options under consideration.

Capital allowances: annual investment allowance

In addition to bringing in full expensing, the government has announced that the increase to the limit of the annual investment allowance (AIA) from £200,000 to £1,000,000 for qualifying expenditure on plant and machinery, which has applied temporarily to expenditure incurred on or after 1 January 2019, will be made permanent. This increase would otherwise have expired.

The permanent level of the AIA was initially set at £200,000 with effect from 1 January 2016. The AIA is a 100% capital allowance for qualifying expenditure on plant and machinery up to a specified annual limit i.e. it provides an equivalent benefit to full expensing for the expenditure covered. Businesses can claim the AIA in respect of expenditure which would otherwise be eligible for writing down allowances (WDAs). Given at either the main or special rates, WDAs provide relief for eligible capital expenditure over a number of tax periods. The AIA therefore accelerates relief, typically simplifying processes for businesses and aiding their cashflow. This measure will provide an incentive for businesses to increase their capital expenditure on plant and machinery.

The measure will have effect in relation to AIA qualifying expenditure incurred from 1 April 2023, and is in line with the UK’s policy goal of incentivising investment in UK businesses.

Capital allowances: first year allowances for electric vehicle charging points

The Spring Budget 2023 introduces a measure to extend the availability of a 100% first-year allowance (FYA) for qualifying expenditure on plant and machinery (equipment) for electric vehicle charge-points by two years.

The FYA was introduced for expenditure incurred from 23 November 2016 to support the UK transition to cleaner vehicles. This measure is designed to continue to incentivise the uptake of equipment for charging electric vehicles and aligns the period of its availability with the 100% FYAs available for zero-emission cars and zero-emission goods vehicles.

The FYA will therefore be extended to 31 March 2025 for corporation tax purposes, and to 5 April 2025 for income tax purposes. This measure aligns with the government’s policy goal of incentivising businesses to install charging points, and therefore purchase zero emission vehicles to support the government’s wider objective on climate policy to reduce greenhouse gas emissions to net zero by 2050.

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.

Corporate interest restriction amendments

The 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.

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. This will be legislated for in a future Finance Bill and qualifying SMEs would be eligible to receive this additional relief 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 are 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.

The Technical Note provides a definition of an ‘R&D intensive’ company as 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. Rules will be included in the legislation to target anti-avoidance and prevent manipulation of the relief for a tax advantage, including for commencement purposes and across the relief more widely.

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).

Patent box

A ‘legislative fix’ to the Corporation Tax Act 2010 (CTA 2010) will ensure that companies elected into the Patent Box will continue to pay corporation tax at the correct rate from 1 April 2023. The revision to s.357A CTA 2010 will ensure that companies with profits of £50,000 or less, pay the correct preferential rate of 19% corporation tax on their Patent Box profits. Leaving the legislation unamended would have meant these companies could, effectively, have paid a rate lower than 10% on their relevant Patent Box income.

Tax advantaged employee share schemes

Those who haven’t blocked out all memories of the first half of 2021 may recall that the government launched a review of the Enterprise Management Incentives (EMI) scheme during that period, with the stated intention of examining whether the scheme should be available to more companies. The EMI scheme is one of several tax-advantaged employee share schemes, and is intended to help SMEs recruit and retain talent through share incentives. There was a call for evidence that closed in May 2021 which had 48 respondents, and after some considerable delay a summary of response has now been published alongside the Budget.

In the interim it was announced in the Spring Statement 2022 that the EMI scheme was still “effective and appropriately targeted”, followed in September 2022 by an announcement of an expansion of the Company Share Option Plans Scheme (CSOP) with the intention of ensuring that companies can graduate more smoothly from the EMI scheme to the CSOP scheme and continue to offer attractive share-based remuneration.

Accordingly, as previously announced from 6 April 2023 the CSOP scheme rules will be amended to:

• Remove the restriction imposed on companies with more than one class of shares that the shares to be placed under CSOP options must either be open market shares or employee control shares; and
• Double the employee option limit from £30,000 to £60,000.

In addition, some tweaks are being made to the EMI scheme with effect from 6 April 2023 in order to reduce the administrative burdens of compliance with the scheme:

• Removal of the requirement for the company to declare that that the employee has signed a working time declaration when they are granted an EMI option (NB the actual working time requirement is not removed); and
• Removal of the requirement to set out in an option agreement restrictions on the shares to be acquired.

From 6 April 2024 there will also be an extension of the time within which companies must submit an EMI notification relating to the grant of an EMI option (currently within 92 days of option grant) to the 6 July that follows the end of the relevant tax year in which the EMI option is granted.

In addition, the government has announced that it will be launching a call for evidence on the Share Incentive Plan and Save As You Earn employee share schemes. The government will use the call for evidence to consider opportunities to improve and simplify the schemes.

Investment reliefs

It is seemingly a tradition that every Budget must include some tinkering with the terms of the UK’s various venture capital schemes, and the Spring Budget 2023 does not disappoint.

As previewed in September 2022, the Seed Enterprise Investment Scheme (SEIS) has received a boost in the form of relaxations of the rules on the size and age of companies that can raise SEIS-qualifying funding and the amounts on which investors can claim income and capital gains tax reliefs, in all cases with effect from 6 April 2023.

The changes are as follows:

Sovereign immunity

Alongside the Spring Budget 2023, the UK government has confirmed that, following “careful consideration” of the responses to the consultation last year on the scope of the UK’s application of sovereign immunity to tax, it has decided that the UK’s sovereign tax exemption will continue to operate as it does now. This news will be a relief to many sovereign wealth funds which had engaged with the consultation and had particular concerns about the potential wider implications of such investors no longer being “qualifying investors” alongside other institutional investors for the purposes of the UK’s REIT rules and substantial shareholdings exemption. Those sovereign wealth investors with portfolio management activities located in the UK will also be relieved not to have to grapple with the potential transfer pricing implications of such activity giving rise to a UK permanent establishment.

One consequence of carrying forward the changes which were consulted on could have been to make the UK materially less attractive to sovereign wealth investment, and it may have been this factor which has ultimately persuaded the Government not to go ahead.

Audio-visual tax reliefs

HM Treasury has released it consultation outcome and policy decisions in respect of ’Audio-Visual Tax Reliefs’ (AVTRs), namely: film tax relief; animation tax relief; high-end TV tax relief; children’s TV tax relief; and video games tax relief.

The policy decisions are designed to modernise the original tax relief implemented in 2007 to “support and incentivise the production of culturally British film, animation, high-end TV, children’s TV and video games”. The reforms merge AVTRs into two new models: audio-visual expenditure credit (AVEC) and video games expenditure credit (VGEC).

AVEC will have a headline rate of 34% for films and high-end TV programmes and a headline rate of 39% for animations and children’s TV programmes.

VGEC will have a headline rate of 34% for video game expenditure credits.

Both models will retain the existing eligibility requirements and definitions of qualifying expenditure (subject to certain conditions) and will have an 80% cap on qualifying expenditure (i.e. tax credits are only payable on up to 80% of the total qualifying expenditure).

Cultural sector tax reliefs

It was announced at the Spring Budget 2023 that the government will legislate in the Spring Finance Bill 2023 to extend the current headline rates of relief for the Theatre Tax Relief (TTR), Orchestra Tax Relief (OTR) and Museums and Galleries Exhibitions Tax Relief (MGETR) for two years.

The rates for TTR and MGETR, which were due to taper to 30% (for non-touring productions) and 35% (for touring productions) on 1 April 2023, will remain at 45% and 50% respectively until 31 March 2025. From 1 April 2025, the rates will be 30% and 35% and rates will return to 20% and 25% on 1 April 2026.

The rates for OTR will remain at 50% for expenditure taking place from 1 April 2023, reducing to 35% from 1 April 2025 and returning to 25% from 1 April 2026.

The tax relief available for qualifying companies in the museum and gallery sectors is due to expire in March 2024. However, the Spring Budget 2023 announced that the government will legislate in the Spring Finance Bill 2023 to extend the sunset clause for the MGETR for a further two years until 31 March 2026. MGETR will, therefore, now expire after 31 March 2026 and no expenditure after this date will be eligible for relief.

A number of administrative changes have also been announced to these reliefs, including limiting their scope to expenditure on goods and services that are used or consumed in the UK only and introducing an anti-abuse measure on payments between connected parties. Draft legislation will be published in summer 2023 for consultation. The changes will take effect from January 2024.

Electricity generator levy

As announced at Autumn Statement 2022, the government will legislate in the Spring Finance Bill 2023 for the Electricity Generator Levy. This new 45% charge applies from 1 January 2023 to exceptional electricity generation receipts arising from non-fossil fuel sources to corporate groups with more than 50,000 MWh of in-scope generation per annum. It applies to wholesale receipts for electricity in excess of a benchmark price of £75 per MWh. The benchmark will be adjusted in line with CPI from 1 April 2024. Exceptional receipts are calculated after deducting increases in generation fuel costs, and groups have an annual allowance of £10m.

Draft legislation and a technical note were published on 20 December 2022.