UK Autumn Statement 2023

The Chancellor, Jeremy Hunt, delivered his Autumn Statement on 22 November 2023. Whilst previously saying there would be little room for tax cuts this year, the Government considers that it is in a better position to be able to deliver some tax cuts and incentives for businesses and individuals, largely due to falling inflation rates and an increased tax take from maintaining income tax thresholds for a number of years.

With a general election in sight, the Chancellor began his speech stating he had 110 measures to boost growth for businesses. Whilst the Tax team at DWF is busy analysing the detail, some of the key points include:

Full expensing made permanent

At Spring Budget, the Government introduced temporary "full expensing" for certain capital expenditure by companies subject to corporation tax on new qualifying plant and machinery between 1 April 2023 and 31 March 2026. In the Autumn Statement, the Chancellor announced that "full expensing" would be made permanent. This measure had been expected and will be welcomed by many businesses.

Full expensing enables companies to claim:

• 100% corporation tax relief on new qualifying "main pool" expenditure (which accounts for most plant and machinery); and
• 50% initial relief for "special rate pool" expenditure (which includes certain types of long life assets (with expected economic lives of over 25 years) and integral features), with the balance of the special rate pool expenditure written off in future accounting periods currently at a rate of 6%.

The full expensing regime was designed to fill the gap left behind by the end of the "super-deduction" (which applied to capital expenditure from 1 April 2021 to 31 March 2023). The announcement to make "full expensing" permanent will provide greater clarity for businesses planning long term capital expenditure.

Making the full expensing rules permanent means an enduring and significant difference in the way that certain capital expenditure is treated, as some capital expenditure does not qualify for full expensing. This includes used and second hand plant and machinery, as well as cars and certain leased capital items, although the Government has committed to publishing a technical consultation to consider any potential extension to include plant and machinery for leasing.

As leased plant and machinery remains outside of the scope of full expensing for the time being, the distinction between "background plant and machinery" in buildings (in respect of which full expensing may be available even though the building is leased) and other plant and machinery (in respect of which full expensing will not be available where the plant and machinery is leased), will continue to be important.

The Government intends to legislate for this change in the next Finance Bill and has committed to launching a technical consultation on wider changes to the capital allowances legislation, with a view to making the operation of the regime simpler.  

Research and development tax relief

Following a consultation launched by the Government at Spring Budget 2021 to review the UK's Research and Development ("R&D") tax regimes, the Chancellor announced three changes in the Autumn Statement:

• the merger of the Small and Medium Enterprise ("SME") and Research and Development Expenditure Credit ("RDEC") schemes;
• enhanced support for R&D intensive SMEs; and
• a restriction of nominations and assignments for R&D reliefs.

There are currently two schemes to enable companies to claim R&D tax relief, which operate differently: the R&D SME scheme and the RDEC scheme.

From 1 April 2024, the schemes will be merged, resulting in a single R&D tax credit, initially implemented at the rate of 20% (mirroring the RDEC regime) whilst incorporating the PAYE and National Insurance contributions cap which is a feature of the SME scheme.

The Government suggests that the merger will simplify and improve the claim process, whilst reducing high levels of non-compliance in claiming R&D reliefs.

SMEs that are defined as 'R&D intensive' and loss-making, qualify for a higher rate of R&D credit. The Autumn Statement extends the definition of an R&D intensive company from one whose R&D expenditure constitutes at least 40% of its total expenditure to one whose R&D expenditure is at least 30% of total expenditure from 1 April 2024. The Government estimates that the reduction in the expenditure threshold will result in a further 5,000 R&D intensive SMEs being eligible for the enhanced relief.

With effect from 22 November 2023, tax credits will no longer be assignable to a third party. Further, from 1 April 2024, all R&D claimants (whether under the current schemes or the merged scheme) will receive their R&D tax credit payments directly, and HMRC will make payments to third parties in only limited and exceptional circumstances.

HMRC acknowledges that the use of nominations is generally not associated with fraud, but that a high proportion of fraudulent R&D tax credits claims do use nominee accounts. The Government therefore believes that this measure will help reduce non-compliance from its current estimated level of 16.7% of the total value of tax credit claims.

R&D tax credits are valuable to businesses in almost all sectors and of all sizes. The changes announced at Autumn Statement are designed to make the system easier to navigate, and will hopefully allow HMRC the time and resource to engage properly where they are undertaking enquiries into claims.

National insurance contributions

The headline announcement is a cut of two percent to employee Class 1 National Insurance contributions from 6 January 2024. Currently, employees pay 12% Class 1 National Insurance on earnings over £12,570, and 2% on earnings over £50,270.

For the self-employed, the Chancellor also announced measures to cut both Class 2 and Class 4 National Insurance contributions. Currently, Class 2 contributions are set at the flat rate of £3.45 a week, which individuals pay if their profits exceed £12,570 a year. Class 4 contributions are charged at 9% on profits between £12,570 and £50,270, and at 2% on profits over £50,270. The Autumn Statement announced the abolition of the compulsory flat-rate charge for Class 2 contributions from 6 April 2024, although individuals may still make voluntary contributions. In addition, the tax rate on earnings between £12,570 and £50,270 for Class 4 contributions will decrease by one percent, bringing it down to 8%.

The reductions in National Insurance contributions rates will directly affect a person’s take-home pay. The Chancellor stated that an employee earning £35,000 (the average UK salary) would take home approximately £450 more per year. Furthermore, he asserted that around two million self-employed individuals would see an average increase of £350 in their annual income, starting from April 2024.

Whilst National Insurance contributions rates have been cut, the income tax and National Insurance contributions thresholds for individuals remain frozen at current levels until 2028. As a result of inflation and wage growth, along with the increase in the National Living Wage, more people will be pulled into either paying tax or the next tax band. According to the Office for Budget Responsibility forecast, these frozen thresholds will result in "nearly four million additional workers paying income tax, three million more moved to the higher rate, and 400,000 more paying the additional rate".

Businesses should be ready for required payroll changes for January 2024 and internal communications with employees.

National Living Wage

National Living Wage ("NLW") is the statutory minimum wage for workers aged 23 and over. The Government announced on 21 November 2023, that with effect from 1 April 2024, NLW would apply to those aged 21 or over. Rates for minimum wages will increase as follows:

Businesses will need to apply the increase in wages for those earning NLW. They will also need to consider the effect on wages for those that currently earn slightly more than NLW and whether they may want to offer a pay rise from 1 April 2024.

Enterprise Investment Scheme and Venture Capital Trust scheme

The tax benefits of the Enterprise Investment Scheme ("EIS") and Venture Capital Trust ("VCT") scheme have been extended for a further ten years. The EIS and VCT legislation contained a sunset clause, which limited the tax benefits of investing in eligible companies to shares issued before 6 April 2025. In the Autumn Statement, the Chancellor announced that the sunset clauses have been extended for a further ten years, to 6 April 2035, providing certainty on the continued availability of the schemes.

Alcohol duty

The Government has announced that it will freeze alcohol duties until 1 August 2024, and delay its annual uprating decision which was due to take place in the spring. This will provide some comfort to producers and retailers who are still getting familiar with the alcohol duty regime change introduced in August this year.

Tobacco duty

The Chancellor announced that the duty rate on all tobacco products will increase from 6pm on 22 November 2023. The duty rate on all tobacco will increase by the tobacco duty escalator of 2% above RPI inflation. The duty rate for hand-rolling tobacco will rise by an additional 10%, to 12% above RPI inflation. 

Business rates

The Government also made some business rates announcements relevant to businesses with premises in England. These measures are designed to support smaller businesses and those in the retail, hospitality and leisure sector. Businesses eligible for the retail, hospitality and leisure relief operating in England can obtain a 75% reduction of their annual business rates bill, up to a maximum relief of £110,000 per business. This relief was initially intended to end in April 2024, but it has been extended for a further tax year. In an announcement relevant to small businesses operating in England, the small business multiplier will be frozen for a further year at 49.9p, with the standard multiplier being uprated by the September CPI figure to 54.6p. This means that business rates for properties with a rateable value up to £51,000 will remain the same, rather than rising in line with inflation.

Pensions taxation

As part of the Government's plans to free-up defined benefit scheme assets for investment in growth areas, the authorised surplus payment charge (the "ASPC") will be reduced from 35% to 25% from 6 April 2024. The ASPC is a freestanding income tax charge on payments returned by registered occupational pension schemes to sponsoring employers. This will be welcome news to employers, who will see less deductions to any surplus payments.

The ASPC exists to reverse-out the tax relief arising to employers (as a deductible expense) when pension contributions were originally made. That rationale explains why the ASPC doesn't fall on payments made to tax exempt entities or charities: those employers wouldn't have received tax relief on amounts contributed, and so no tax is charged on the surplus funds' return leg. 

Historically, the ASPC didn't necessarily mirror the tax relief on the contribution paid. Relevant firms may not have paid corporation tax at the headline main profits rate, or, even if they did, that rate may have been lower than the ASPC. The increase in the UK corporation tax main rate from 1 April 2023, and the new reduction of the ASPC (both are now set at 25%) goes some of the way to rectifying the mismatch. It still remains the case that employers who previously received corporation tax relief at 19% will be charged on the surplus payments on the new higher rate but this should be less, and will continue to decrease over time (provided rates remain the same).

The change also supports the Government's liberation of assets held in defined benefit schemes. Exactly how and to what degree remains unclear. To the extent the 35% charge prevented schemes extracting capital, the reduced rate now makes transfers more appealing. But our experience is stringent rules on repayment of surpluses and limited capacity in the insurance market are the real factors trapping assets, not necessarily the tax charge. These questions will hopefully be considered as part of the promised consultation on how surplus can be accessed.

Construction Industry Scheme

In April 2023, the Government published a consultation to seek responses from stakeholders regarding potential reform of the Construction Industry Scheme ("CIS"). The consultation sought views on a number of proposals with the main areas of concern being:

1. a proposal to include Value Added Tax ("VAT") to the compliance tests for sub-contractors seeking gross payment status ("GPS") for CIS purposes; and
2. reforms to address the issue of landlord to tenant payments being caught by the CIS.

DWF responded to the consultation and expressed our view that the inclusion of VAT within the GPS compliance tests seemed reasonable but that the Government should ensure that any potential loss of GPS due to VAT non-compliance was limited to serial and material breaches. We also expressed the view that legislative reform was required to remove the vast majority of landlord to tenant payments from the scope of the CIS.

Alongside the Autumn Statement, the Government issued a response to the consultation confirming that it intends to legislate, with effect from April 2024, to:

1. incorporate VAT into the GPS compliance tests;
2. remove the majority of landlord to tenant payments from the scope of CIS; and
3. increase HMRC's ability to immediately cancel GPS in the case of fraud.

We are pleased that the Government has acknowledged concerns regarding minor VAT non-compliance resulting in the loss of GPS and has confirmed that there will be exceptions to the VAT compliance obligations. It is also positive news that the Government will legislate to remove the majority of landlord to tenant payments from the scope of CIS. This should prevent many payments that were never intended to be caught by the CIS being subject to the regime and will provide a real benefit to businesses and reduce the significant costs associated in seeking professional advice when assessing whether the CIS applied to payments to tenants.

We understand that draft primary legislation has been shared with the Construction Forum and that draft regulations will be subject to consultation in due course.

Investment zones and freeports

In the Spring Budget, the Government announced that it would create 12 Investment Zones, with "special tax sites" to be designated. Initally the Investment Zone programme was due to end in 2029. In the Autumn Statement, the Government announced that the programme will be extended from five to ten years, to end in September 2034 (doubling the investment funds available from an £80 million investment envelope to a total £160 million investment envelope). Tax reliefs available in designated Freeports will also be extended from five to ten years, to end in September 2031.

The first two Investment Zones were designated in July 2023, being Liverpool and South Yorkshire, with a focus on life sciences and advanced manufacturing respectively. The Government has now announced the locations of three further Investment Zones, which will be in Greater Manchester, the West Midlands and the East Midlands, all with a focus on advanced manufacturing. Wales will now benefit from two of the Investment Zones.

Investment Zones benefit from certain tax advantages, such as full stamp duty land tax relief, a higher employer National Insurance contribution threshold and full business rates relief, where applicable.

This announcement should provide investors with some assurance that the Investment Zones programme will provide benefits over a longer term and avoid the potential for a cliff-edge, detracting investment in the short-term.