Autumn Statement 2023: harvesting Hunt's windfall

When Chancellor Jeremy Hunt took up the helm late last year in the aftermath of Kwasi Kwarteng's ill-fated and short-lived Growth Plan, his job was clearly to steady the ship. His Autumn Statement of November 2022 featured a suite of tax increases - some simply cancelling (unfunded) tax cuts promoted in the Growth Plan, but others new (such as lowering the higher rate income tax threshold and additional windfall tax measures) - designed to placate and reassure the markets that the government retained its fiscal credibility. This has led, due in no small part to the recent fiscal shocks of the pandemic and the war in Ukraine and the resulting cost of living crisis, to the highest UK tax burden since records began in 1965.

In the wake of last autumn's political upheavals, the bitter pill of tax increases was reluctantly swallowed as necessary and unavoidable treatment. But for a Conservative administration that prides itself as the Party of low taxation, these high levels of tax are a political problem. There is growing unrest on the Conservative backbenches and a recognition that, with a general election in the next year or so, the Conservative Party must seek to differentiate itself by going back to its core values of low taxation - or at least give that impression.

And so, a few short months after ruling out any tax cuts, the Chancellor has unveiled a "tax cutting" Autumn Statement. Paradoxically, what has allowed the fiscal headroom for these announcements, is precisely the same factor that (in part) prevented tax cuts in the first place - inflation. The so-called "stealth taxes" - the freezing of tax rate boundaries - have been more successful than expected due to recent high inflation rates. And so, these higher tax yields allow a degree of fiscal headroom for today's announcements.

These announcements most notably include the permanent extension of full expensing for business expenditure on plant and machinery and significant cuts to national insurance rates for the employed and self-employed. There is, however, very much an element of giving with one hand whilst taking away with the other as those much bigger stealth tax increases are still due to remain in place until April 2028.

Chancellor Hunt remains precariously balanced on a political and economic tight-rope, with prudence and growth pulling from opposite ends. There must be enough fiscal prudence to avoid a negative market reaction to any loosening of the tax and spending measures put in place last autumn, but not so much that it stifles growth and further alienates Conservative backbenchers. Politically, the gloomy economic landscape of 2022 must be replaced by a more rosy, optimistic picture by the time the next election comes around and the Autumn Statement represents the Chancellor's first steps in that direction. More can be expected in the Spring Budget next year.

For our accompanying economic analysis of the Autumn Statement see here.

Business taxes

Corporation tax: The headline rate of corporation tax increased 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.

Capital allowances - full expensing: Full expensing - or 100% capital allowances on expenditure on main rate qualifying plant and machinery in the first accounting period - was introduced in the Spring Budget 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. That ambition has now been realised with the announcement at the Autumn Statement that it will indeed be put on a permanent footing - though cynics may note that, in this context, "permanent" simply means that it will remain in place until someone decides to change it in the future.

This will no doubt be welcomed by businesses and provides a helpful stimulus for capital expenditure whilst, in practice, costing the government relatively little over the longer term. Though it is perhaps worth remembering that the 2022 Policy Paper on possible reforms to capital allowances noted that no other country in the G7 has implemented full expensing on a permanent basis and that such a measure risked incentivising inefficient, low-return debt-financed investment.

Alongside the move to make full expensing permanent, HM Treasury announced the launch of a technical consultation on wider changes to the capital allowances legislation, with the ambition to simplify the capital allowances system as a whole. The consultation will focus on changes to capital allowances available for expenditure on the provision of plant and machinery and is not intended to consider reforms to other capital allowances such as structures and buildings allowances, and research and development allowances. Equally, the consultation is not intended to extend the scope of expenditure that is eligible for capital allowances nor review the rates at which different allowances are available. The government will continue to consider whether there is a case to extend full expensing to leasing. The government will hold working group meetings with interested stakeholders from January 2024 onwards and seek to publish draft legislation in Summer 2024.

Annual Investment Allowance: Last year's Autumn Statement confirmed that the government would set the Annual Investment Allowance (AIA) at a permanent level of £1m from 1 April 2023. No further proposals to change AIA are included in the proposed technical consultation on capital allowances.

R&D tax reliefs: In last year's Autumn Statement, the Chancellor announced significant reforms to the rates of R&D tax reliefs and a consultation on the design of a possible single scheme merging the existing, separate R&D Expenditure Credit (RDEC) and SME schemes. Draft legislation for that merged scheme was published earlier this year without, however, any commitment to go ahead with the proposal.

The 2023 Autumn Statement now confirms that the government will introduce a single, merged R&D tax relief scheme with effect from accounting periods starting on or after 1 April 2024 (rather than for expenditure incurred on or after 1 April 2024). Further details of the scheme can be found in the government's press release.

Despite the merger of the RDEC and SME schemes, the UK will still have two R&D tax relief schemes going forwards. The SME intensive scheme, for the most R&D intensive loss-making SMEs, was announced at Spring Budget 2023 for R&D expenditure from 1 April 2023. A company was considered R&D intensive where its qualifying R&D expenditure is 40% or more of its total expenditure. The Autumn Statement has announced that the threshold to be considered R&D intensive will be reduced from 40% to 30% of total expenditure with the change to be introduced in the Autumn Finance Bill 2023.

OECD Pillar 2: The Autumn Statement confirms that the government remains committed to delivering the landmark G20/OECD two-pillar reform to the international tax system in response to the challenges posed by the digitalisation of the economy. 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%. The UK measures include the introduction of a 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%, ensuring that profits made in the UK are taxed in the UK.

However, the Autumn Statement states that it is important that the UK implements Pillar 2 to a similar timeline as other countries, noting that more than 30 countries across the world have taken steps towards implementation. Other countries moving to implement Pillar 2 from 31 December 2023 or 1 January 2024 include members of the European Union, where a Directive obliges all but the smallest Member States to implement Pillar 2 from 31 December 2023, Australia, Canada, New Zealand, South Korea, Switzerland and Vietnam. Japan is implementing from 1 April 2024. Jurisdictions implementing in 2025 so far include Thailand and Singapore with many more countries expected to follow.

The fact that the government states it will continue to monitor international developments on implementation suggests that the current UK implementation date is not necessarily set in stone (as opposed to set in legislation).

As regards the Undertaxed Profits Rule, which forms part of the G20-OECD global minimum tax framework, this will be introduced in the UK for accounting periods beginning on or after 31 December 2024, with legislation included in a future Finance Bill. The undertaxed profits rule will ensure that any top-up taxes that are not paid under another jurisdiction's Pillar 2 rules are brought into charge in the UK.

The government will also make technical amendments to the Multinational Top-up Tax and Domestic Top-up Tax legislation through the Autumn Finance Bill 2023, including reviewing the conditions to be treated as an investment entity and dealing with the position of certain vehicles used in securitisation transactions, to mitigate the risk of unexpected liabilities arising. Further details are set out in an accompanying press release.

Offshore Receipts in respect of Intangible Property (ORIP): The government will abolish the ORIP rules in respect of income arising from 31 December 2024. ORIP's repeal will be legislated for in a future Finance Bill, and take place alongside the introduction of the Pillar 2 Undertaxed Profits Rule, which will more comprehensively discourage the multinational tax-planning arrangements that ORIP sought to counter.

Creative industries tax relief: The Autumn Statement has announced that the government will provide additional tax relief for expenditure on visual effects by increasing the generosity of the Audio-Visual Expenditure Credit for visual expenditure. The government intends to consult on the detailed policy design of further support and intends to implement changes to the expenditure credit from April 2025. The government has published a call for evidence alongside the Autumn Statement to inform the design of additional, targeted reliefs.

Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT): It has been announced that the government will legislate in the Autumn Finance Bill 2023 to extend the existing sunset clauses for the EIS and VCT from 6 April 2025 to 6 April 2035.

Freeports and Investment Zones: The Autumn Statement announced that the government will extend the sunset date for the Freeport tax reliefs to 30 September 2031 for Freeports in England. Equally, the government will extend the Investment Zones tax reliefs from five to ten years. The current sunset date for SDLT relief, enhanced structures and buildings allowances and enhanced capital allowances for plant and machinery is 30 September 2026. The secondary Class 1 NICs relief is currently available on the earnings of eligible new employees starting by 5 April 2026 only. The National Insurance contributions relief will continue to apply for 36 months per employee within the extended ten-year window.

Consultations: It might be noted that a number of eagerly awaited consultation responses failed to materialise at the Autumn Statement, most notably those dealing with the proposed restricted investor fund, changes to transfer pricing, diverted profits tax and permanent establishment definition, VAT and investment fund management and reform of stamp duty and SDRT.

Personal taxes

Income tax: Despite suggestions that the Chancellor might pre-announce a reduction in the basic rate of income tax, the basic rate of income tax remains at 20%. No further announcements were made and so the personal allowance and higher rate threshold will remain fixed at their current levels until April 2028.

NICs: Few taxes have suffered such a roller-coaster ride as NICs in the last few years. From the heady highs (or lows depending on your perspective) of the increase to 13.25% in anticipation of the introduction of a Health and Social Care Levy to the scrapping of that increase by Kwasi Kwarteng and now a 2% reduction in employee NICs. The so-called "tax on jobs" must feel like a political football!

The Chancellor has announced that the main rate of Employee National Insurance (Class 1 NICs) will be cut by 2% from 12% to 10% from 6 January 2024. There was no mention of the 2% rate of NICs for higher earners and so this is expected to remain unaffected as will other rates, including employer Class 1 NICs.

The Chancellor also announced a reform and simplification of NICs on the self-employed. This will involve effectively abolishing Class 2 NICs by removing the requirement for self-employed people to pay these and cutting the main rate of Class 4 NICs by 1% from 9% to 8% from April 2024.

Further details of the changes are set out in the government press release.

IR35: HMRC has responded to its April 2023 consultation on proposals to introduce a legislative change to address the potential over-collection of tax under the IR35 rules. This change would allow HMRC to account for taxes already paid by an individual and/or their intermediary when calculating a PAYE liability due by a deemed employer where an error has been made in applying the off-payroll working rules. The majority of respondents supported the government's policy intent to allow HMRC to account for taxes already paid when calculating a deemed employer's PAYE liability under the off-payroll working rules. Legislation will be included in the next Finance Bill, and will come into effect from 6 April 2024.

Capital taxes

Capital gains tax: As previously announced, the government will reduce the CGT annual exempt amount to £3,000 from April 2024.

IHT: Despite persistent rumours around possible IHT changes, no announcements were made. As such, the inheritance tax nil-rate bands are already set at current levels 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.

ISAs: The government is freezing the Individual Savings Account (£20,000), Junior Individual Savings Account (£9,000), Lifetime Individual Savings Account (£4,000 excluding government bonus) and Child Trust Fund (£9,000) limits at their current levels for 2024/25. However, a number of improvements and administrative changes are being introduced from April 2024, including:

• Allowing multiple subscriptions to ISAs of the same type every year.
• Allowing partial transfers between of ISA funds in-year between providers.
• Expanding the Innovative Finance ISA to include Long-Term Asset Funds and open-ended property funds with extended notice periods.
• Allowing certain fractional shares contracts as eligible ISA investments.
• Harmonising the account opening age for adult ISAs to 18 for all types of ISA.

Stamp duty: No further changes were announced in relation to stamp duty at the autumn statement. However, the annual chargeable amounts for the ATED applicable to enveloped dwellings will be uplifted by the September CPI figure of 6.7% for the 2024-25 ATED charging period.

Pensions

The key pension themes in the Autumn Statement are consolidation and increasing the scope for improved investment performance. In the government’s view these are two sides of the same coin, in that larger schemes are better placed to diversify into growth investments and drive down fees.

On fees however (including member fees), the statement makes it clear that long-term investment performance should be prioritised over low fees when employers are selecting a pension scheme. In this context, the government will be engaging with industry on how to shift employer incentives away from low fees and towards long term investment performance. It remains to be seen how this will interact with the proposed ability for employees to select their own pension fund vehicle to which an employer would need to contribute (see below on Tackling small pot pensions).

Consolidation for defined contribution (DC) schemes: The Autumn Statement welcomes trends identified by the Department for Work and Pensions (DWP) towards DC schemes consolidation, and expects that by 2030 the vast majority of pension savers will belong to a scheme of £30 billion or larger in size. To help with this push toward consolidation, the government has pointed out that the FCA will be consulting in 2024 on the new Value for Money Framework. The implication is that if schemes cannot show that they are delivering value for members relative to their comparators, they will need to consolidate.

Consolidation for defined benefit (DB) schemes: Recognising that there is a category of DB schemes that are unattractive to commercial consolidators, the Autumn Statement indicates that the government will be shortly consulting on how the Pension Protection Fund could act as a consolidator for those schemes. This would involve a balance being struck between protecting member benefits on the one hand and incentivising greater investment in assets with higher returns.

Tackling ‘small pot’ pensions: Consolidation continues to be the theme in relation to DC member pension pots with the announcement that there will be a call for evidence in relation to a Lifetime Provider Model. This model would allow employees to select a pension scheme where their employer would pay pension contributions. This would make it more likely that an employee would have one pension pot for life avoiding the inefficiencies linked to having multiple small pots linked to different employers over an employee’s working life. Linked to this, the government will allow a small number of authorised schemes to act as a consolidator for eligible pension pots below £1,000.

Tax on Surplus funds paid to DB employers: The Autumn Statement indicates that the DWP will soon launch a consultation on a proposed new regime under which funding surpluses can be repaid to employers at lower tax rates than currently apply (reducing from 35% to 25% with effect from 6 April 2024). This would not operate in a vacuum and would be accompanied by measures that protect member benefits. The aim would be to incentivise investment by well-funded schemes in higher return assets (without compromising member security) and would presumably affect the current trend towards full de-risking and insurer buy-out

Other announcements

Tax simplification: Despite the abolition of the Office of Tax Simplification, the Autumn Statement confirms the government's commitment to tax simplification to support growth and fairness with four main objectives:

• Tax rules should have a clear consistent rationale and be easy to understand.
• The burden of compliance and administration should be proportionate for taxpayers and HMRC and it should be easy for taxpayers to get their tax right.
• Taxpayers should be able to understand their obligations and options particularly at key lifecycle points, such as when they do something for the first time or infrequently.
• Tax policy should not unnecessarily distort the decisions of taxpayers and result in poorly informed choices.

The government will measure annual progress against these objectives, focusing on taxpayers' experience and prioritising the impact of complexity on individuals and small businesses. The government will update on these metrics before the end of 2023/24.

In this context, the Autumn Statement points out that it is seeking to build on these policies in a number of ways:

• Expanding the 'cash basis' - a simplified way for over four million sole traders and partners to calculate and pay income tax.
• Introducing a package of changes to simplify the design of Making Tax Digital (see below).
• Merging the R&D Expenditure Credit (RDEC) and the SME scheme by combining the best parts of both reliefs under a common set of rules.

Making tax digital: Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) will require self-employed individuals and landlords to use compatible software to keep digital records and send quarterly updates to HMRC, so that tax records are kept up to date. Those with annual income over £50,000 will be mandated to join MTD from April 2026, followed by those with income over £30,000 from April 2027. The government remains committed to the future introduction of MTD for ITSA to partnerships as part of its tax administration strategy. The government will keep under review the decision on further mandation of businesses and landlords with income below £30,000.

The Autumn Statement 2023 announced that the government will make design changes to the (MTD for ITSA) system. These changes include:

• Simplifying the requirements for all taxpayers providing quarterly updates, and for taxpayers with more complex affairs, such as landlords with jointly-owned property
• Removing the requirement to provide an End of Period Statement
• Exempting some taxpayers, including those without a National Insurance number, from MTD
• Enabling taxpayers using MTD to be represented by more than one tax agent.

A document has been published setting out the outcome of HMRC's review into MTD for ITSA and providing further details of the next steps.

Construction industry scheme: The government has published its response to a consultation that was published in April 2023 on the construction industry scheme, suggesting a number of compliance and simplification proposals to the scheme.

The government confirmed at Autumn Statement 2023 that it will introduce a number of changes with effect from April 2024:

• introduce regulations to remove the majority of payments from landlords to tenants from the scope of the CIS
• add compliance with VAT obligations to the Gross Payment Status (GPS) compliance test, with corresponding regulations setting out exceptions to VAT compliance obligations
• expand the grounds for immediate cancellation of GPS. VAT, Income Tax Self Assessment (ITSA), Corporation Tax Self Assessment (CTSA) and Pay As You Earn (PAYE) will be added to the taxes where HMRC is able to immediately cancel GPS if they have reasonable grounds to suspect that the GPS holder has fraudulently provided an incorrect return or information.

VAT on private hire vehicles: The Autumn Statement contained the announcement that the government will consult on the VAT treatment of private hire vehicles in early 2024. The decision follows the High Court ruling in Uber Britannia Ltd v Sefton MBC, where Uber successfully sought a declaration that all private hire operators in the UK should be subject to the same rules as Uber on classification of workers and status as principal. The has resulted in a requirement to charge VAT on such services not only for Uber but other operators in the same position.

HMRC: Hidden away at the back of the Autumn Statement are a number of modest but important measures designed to assist HMRC's operation. They are to include £163 million to strengthen HMRC's debt management function, new powers to tackle fraud by users of the Construction Industry Scheme, and a new criminal offence for unlawful promotion of tax avoidance schemes. Further tweaks to HMRC's customer (sic) experience will include a requirement for businesses to provide further (as yet unspecified) data to HMRC, and - to the late-January delight of high-earning employees - the withdrawal of the requirement for people whose income is entirely made through PAYE to file tax returns.

Alcohol duty: The Chancellor announced a further freeze to alcohol duties until 1 August 2024 and delayed the annual uprating decision to Spring Budget 2024 to give businesses time to adapt to the duty system introduced on 1 August 2023.