Autumn statement: initial thoughts

Yesterday (17 November) the Chancellor of the Exchequer, Jeremy Hunt, delivered his inaugural autumn statement, detailing a number of tax changes.

There have been a number of shifts in tax over the last few months, therefore we begin with a short recap of what remains of Chancellor Kwarteng’s fiscal statement before going on to discuss the plans that Chancellor Hunt announced.

Kwasi uncut, or what Jeremy kept

• The extension of the SDLT nil rate band to £250k for residential property has been kept (but see the sunset clause discussion in 3(d) below). In addition, the reforms to first time buyers’ relief by which the first £425k of the purchase price is subject to 0% SDLT with the tranche from £425,001 to £625k being subject to 5% SDLT have been kept (but see the discussion in 3 (d) on the sunset clause below). The devil in the detail with residential SDLT is whether the 3% additional rate supplement and/or 2% non-UK resident purchaser supplement apply; both Chancellors agreed on one point, namely keeping this tax complexity.
• Chancellor (now Prime Minister) Sunak had introduced a 1.25% employees’ and employer’s national insurance increase; he had intended to rebadge this increase as the health and social care levy from April 2023 in effect creating a new tax. This 1.25% increase plus the new health and social care were reversed by Chancellor Kwarteng. Chancellor Hunt has kept this cut.
• EMI options are a highly tax efficient way of incentivising key employees through stock options. They are not effective in all circumstances. Chancellor Kwarteng relaxed the rules for approved share option schemes with effect from April 2023. In summary, approved option arrangements are nearly as good as EMI options, but not quite. These rules potentially allow companies to put approved option schemes in some places when EMI options are inapplicable.

Kwasi cut, or what Jeremy got rid of

• Chancellor Hunt cancelled Chancellor Kwarteng’s plan to keep corporation tax at the 19% rate. Therefore companies will see a corporation tax increase on 1 April 2023 to 25% from the current 19% rate. However, there is a measure of relief; companies with profits of up to £50k will continue to pay corporation tax at the 19% rate, with profits between £50k and £250k being subject to corporation tax at a tapered rate between 19% to 25%. We can expect to see anti-avoidance rules to prevent companies diverting profits to newcos to make use of the lower rates.
• Chancellor Kwarteng planned a cut in dividend tax rates for individuals, but this has been reversed. Basic rate taxpayers are taxed on dividends at the 8.75% rate, higher rate taxpayers are taxed at the 33.75% rate and additional rate taxpayers are taxed at the 39.35% rate.
• From April 2023 when the additional corporation tax rate kicks in companies will need to calculate carefully if it is more tax efficient for employee shareholders to be rewarded via dividends or bonuses. It will also be important to take the impact of the cut in the additional rate threshold (discussed in 3(a) (iv) below) into account in these calculations too.
• Chancellor Hunt reversed out reforms to the IR35 rules, so the rules will remain as they were prior to the Truss administration. Essentially, businesses which retain personal service companies which supply workers will need to determine if the underlying relationship is an employment one and will need to apply PAYE and NIC accordingly; however, there are carve outs from these rules if the relevant business which retains the personal service company is small, within the meaning set out in the Companies Act 2006.

So what was announced in the autumn statement?

Rates, thresholds and allowances

• The Government had given manifesto commitments not to increase headline personal tax rates and it decided to honour those commitments.
• Prior to the autumn statement there had been discussions that the Government might increase capital gains tax rates from the 20% rate (28% in some cases) to align them with income tax rates. This was a dog which did not bark, with there being no change in capital gains tax rates. This will of course be good news to individuals who may be looking to sell their companies or other investments.
• A further dog which kept quiet is “business asset disposal relief” or BADR. BADR allows certain capital gains to be taxed at the 10% rate, subject to a lifetime allowance of £1m. And the good news here is that nothing happened, no doubt to the relief of individuals who are looking to sell their companies or other investment assets.
• However, the Government has decided to reform thresholds and allowances.
  (a) The £150k threshold at which the additional rates of income tax bite is being cut to £125,140 from April 2023. (The additional rates are the “standard” 45% rate plus the 39.35% rate for dividends).
  (b) The capital gains annual allowance is being cut from £12.3k to £6k in April 2023 and again to £3k in April 2024. This may result in more small investors having to file CGT returns.
  (c) Similarly the dividend allowance is being cut from £2k to £1k in April 2023 and to £500 in April 2024.
• And then there was the “big freeze”. The basic and the higher rate income tax thresholds are to be frozen until April 2028 resulting in higher effective tax rates because of inflation. There are also to be freezes in the inheritance tax, national insurance and the VAT thresholds too, again until April 2028. The pensions lifetime allowance has already been frozen at £1m until April 2026. It will also be interesting to see if it will be frozen until April 2028 too.

The corporate sector

• The Government will be introducing a set of international reforms to increase the tax take on larger corporates with a minimal UK presence which are known as Pillar 1 and Pillar 2; they give effect to the “Google tax”.
• There is some challenging news for R&D tax reliefs relating to the SME sector. SMEs are currently given an additional tax deduction for R&D which is equal to 130% of their R&D revenue expenditure; alternatively SMEs can cash in their R&D tax deductions (as increased by the additional deduction) for a payable credit equal to 14% of the aggregate figure off the Government. The reliefs are being cut to 86% and to 10% respectively. However, companies which qualify for the Research and Development Tax Credit will see an increase in their credits from 13% to 20%. It is worth remembering that former Chancellor (and now Prime Minister) Sunak announced some changes to the R&D rules back in March 2021. The changes included broadening the R&D definition to include cloud computing and data costs. Unsurprisingly these changes will take place as expected from April 2023.
• There is some good news for companies which are acquiring assets which qualify for capital allowances. The first £1m of expenditure on qualifying assets will attract a 100% capital allowance, known as the annual investment allowance. (Typically capital allowances are given at the 18% rate on qualifying expenditure which is far less generous.) Therefore a qualifying company which incurs £1m of expenditure which qualifies for the annual investment allowance will generate a tax deduction of £1m which will save it £250k of corporation tax, assuming that its profits are taxed at the 25% rate from April 2023.
• Further electricity generators will be subject to a 45% windfall tax on top of their existing obligations.
• Import tariffs on over 100 goods which are needed as part of the manufacturing supply chain will be cut for two years. As ever, the devil is in the detail.

Cars

• Currently electric cars enjoy an exemption from vehicle exercise duty, however from 2025 electric vehicles will pay vehicle exercise duty in the same way as ordinary vehicles.
• Further, the current favourable treatment electric vehicles enjoy where they are provided as company cars is to be scaled back from April 2025.

Real estate and stamp taxes, the final Kwasi cut

• The Government is proceeding with a revaluation of properties for business rates purposes. However, the Government is offering transitional relief for affected businesses.
• And finally Kwasi was subject to one last cut – see his SDLT reforms discussed in 1 (a). They are now subject to a sunset clause which means they will expire on 31 March 2025.