Today’s Spring Budget speech focused on moving the UK economy into growth mode. With the increase in the main rate of corporation tax to 25% on the horizon and fast-approaching, the Chancellor turned to reliefs rather than rate cuts to demonstrate his commitment to incentivising investment in the UK. For most businesses, the “headline” announcement in this area will have been the introduction of a generous full-expensing regime for capital allowances, but other important measures include the permanent increase to the Annual Investment Allowance, reforms to Research & Development Tax Reliefs, announcements relating to various creative industry reliefs and new Investment Zones.
Though absent from the Chancellor’s speech itself, a variety of other technical amendments have been released today. We summarise the key tax announcements (both the headlines and the more detailed changes) which are of most relevance to our clients below.
Full expensing for capital allowances
Given the Chancellor’s publicised commitment to increasing the main rate of corporation tax to 25% from 1 April 2023, there were many calls from the business world to introduce generous investment reliefs to soften its impact – especially in light of the imminent end of the temporary 130% super-deduction and 50% special rate first-year allowance for qualifying expenditure on plant and machinery.
A recognition of these calls came in the form of the announcement of the introduction of full expensing for companies investing in plant and machinery from 1 April 2023 until 31 March 2026. Additionally, a 50% first-year allowance will be available for special rate expenditure.
A 100% first-year allowance will be available for qualifying expenditure on the provision of plant and machinery within the relevant time frame. The existing framework for first-year allowances will apply to the temporary allowances, but with separate provisions for disposals. In particular, the exclusions for expenditure on cars and (broadly) plant and machinery for leasing will apply. Plant and machinery must be unused and not second hand.
Reform of Research and Development (“R&D”) tax reliefs
Legislation will be included in Spring Finance Bill 2023 to extend the scope of qualifying expenditure to include the cost of datasets and of cloud computing, for accounting periods beginning on or after 1 April 2023.
In order to meet HMRC’s concerns around abuse of reliefs, claims to relief (whether for a deduction or a tax credit) will in future generally have to be made digitally and to be accompanied by an additional information form.
The additional information form requires taxpayers to break the costs down across qualifying categories and provide a description of the R&D.
Each claim will need to be endorsed by a named senior officer of the company. Taxpayers will need to inform HMRC, in advance, that they plan to make a claim. They will need to do this, using a digital service, within 6 months of the end of the period of account to which the claim relates. Claim notification will only be required where a customer has not made an R&D claim during the period of three years ending with the day before the first day of the claim notification period. Additional information and claim notification forms will need to include details of any agent who has advised the company on compiling the claim.
A number of detailed measures will be introduced, to address anomalies and unforeseen consequences in the operation of the rules.
Additional tax relief for R&D intensive SMEs
It was announced today that legislation in a Finance Bill 2023-24 will provide additional R&D tax relief for eligible R&D intensive SMEs. A new credit relief will be available to loss-making companies whose R&D expenditure constitutes at least 40% of total expenditure. Qualifying companies will be able to claim a payable credit rate of 14.5% for qualifying R&D expenditure instead of the 10% credit rate for companies claiming support under the existing R&D SME scheme.
The changes will take effect from 1 April 2023, with eligible companies able to claim once legislation is in place. Draft legislation will be published for consultation in summer 2023.
Film, TV and video games tax reliefs
Today it was announced that legislation in a Finance Bill 2023-24 will reform the film, TV and video games tax reliefs to refundable expenditure credits. Full details will be published in summer 2023, alongside draft legislation, for comment. Video games, film and high-end TV will have a rate of 34%. Animation and children’s TV will have a rate of 39%.
Further, it was announced today that legislation in a Finance Bill 2023-24 will reduce the minimum slot length required for a high-end TV production to be eligible for the audio-visual expenditure credit, from 30 minutes to 20 minutes.
A video games expenditure credit will be introduced, with a requirement that 10% of expenditure to be on goods or services that are used or consumed in the UK.
Permanent increase to the Annual Investment Allowance (“AIA”)
The government has announced it will permanently increase the AIA limit from £200,000 to £1,000,000 for qualifying expenditure on plant and machinery incurred from 1 April 2023. The AIA would have reverted to £200,000 from 31 March 2023 had this change not been made.
Twelve new “Investment Zones” have been announced, which will have access to interventions of £80 million over five years. Provisions within the Finance Bill will allow special tax sites to be designated within these Investment Zones.
The special tax sites will be able to access a package of tax reliefs, including SDLT relief, enhanced capital allowances for plant and machinery, enhanced structures and buildings allowances, and secondary Class 1 National Insurance Contributions relief.
Pensions tax relief
Prior to the Budget Speech there had been news headlines speculating about an increase in the pension annual allowance and an increase in the pensions lifetime allowance (currently set at £1,073,100). During the speech, the Chancellor confirmed the increase in the annual allowance from £40,000 to £60,000, and announced the abolishment of the lifetime allowance.
These changes will be legislated in the Finance Bill to take effect from 6 April 2023.
Other detailed amendments have been announced, including the increase of the Money Purchase Annual Allowance and the minimum Tapered Annual Allowance from £4,000 to £10,000. The adjusted income threshold for the Tapered Annual Allowance will be increased from £240,000 to £260,000.
UK adoption of OECD Pillar 2
A policy paper published today confirms the Government’s (previously announced) intention to introduce the new multinational top-up tax and its domestic equivalent, in accordance with the G20/OECD Inclusive Framework on Base Erosion and Profit Shifting, with effect for in-scope groups’ accounting periods beginning on or after 31 December 2023.
The multinational top-up tax will introduce a new tax on a ‘responsible member’ of an in-scope multinational group, in circumstances where it has an interest in non-UK entities the profits of which are taxed at a rate below the minimum rate of 15%.
A multinational group will be within the scope of the rules where it has global annual revenues exceeding €750 million in at least two of the previous four accounting periods.
The domestic top-up tax will apply to a UK entity which is a ‘qualifying entity’ within either a domestic or multinational group that has revenues exceeding €750 million in at least two of the previous four accounting periods. It will apply as regards UK profits which are taxed at a rate below the minimum rate of 15%.
Certain entities will be excluded from the rules (including governmental entities, international organisations, non-profit organisations and pension funds). Others – investment funds and real estate investment vehicles – will be excluded where they are the ultimate parent of the group.
The effective tax rate for a jurisdiction will generally be calculated by aggregating the net income and the relevant taxes of all group members in each relevant jurisdiction. Special rules will apply to calculate the effective tax rate of investment entities, joint ventures and minority interests.
The financial accounting net profit or loss of each group member used in the preparation of the consolidated financial statements of the ultimate parent will form the basis for this calculation. However certain adjustments will be required, for example to remove dividends and capital gains or losses from the disposals of shares, with the exception of certain portfolio shareholdings.
In calculating the effective tax rate for each jurisdiction, the group will aggregate its relevant taxes. Adjustments will be made, for example to exclude tax on income which has been excluded from the calculation of profits. There will also be an adjustment to take account of deferred tax, so as to allow for timing differences as between the recognition of income and expenses for tax and accounting purposes.
For multinational top-up tax, a substance-based income exclusion will be applied (broadly 5% of payroll costs and 5% of the carrying value of tangible assets in the relevant jurisdiction). The top-up tax required to bring the tax rate up to 15% will then be allocated to group members in the relevant jurisdiction, generally based on their proportion of the profits in the jurisdiction.
There will be a de minimis exclusion, which will allow an annual election for any top-up tax to be treated as nil where the average revenue of the jurisdiction in which the top-up tax was calculated is less than €10m and the average profit within that jurisdiction is less than €1m.
There will also be a transitional safe harbour to exclude operations in lower-risk jurisdictions in the short-term.
A single member of the group will report the top-up taxes to HMRC, either the ultimate parent or a nominated alternative member. A Globe Information Return will be filed, showing how the top-up tax has been calculated in every jurisdiction.
Amendments to tax-advantaged regimes
Amendments to the Genuine Diversity of Ownership (“GDO”) Condition
Several of the UK’s tax-advantaged regimes (the REIT regime, the QAHC regime, and certain aspects of the non-residents capital gains tax rules) contain the so-called GDO condition. The presence of this condition is intended to prevent investments funds with only a small number of investors from benefitting from such regimes. The way that current legislation is drafted can mean certain funds cannot access these regimes, even though, when the fund structure is looked at as a whole, it is open to a large number of investors.
The amendments to the relevant legislation will mean that where a fund vehicle forms part of a ‘multi-vehicle arrangement’ the entity can meet the GDO condition if it is met in relation to the multi-vehicle arrangement of which the fund vehicle forms part.
In relation to a REIT, this broadens the scope of the exemption from the listing condition. It also widens the number of funds which will be eligible to invest in a QAHC.
Enhancements to the REIT regime
As announced as part of the Edinburgh Reforms, the following three changes will be made to reduce certain administrative burdens and constraints inherent in the current REIT regime rules (in addition to the above-mentioned changes to the GDO condition):
- Amending the rules for the deduction of tax from property income distributions (“PIDs”) paid to partnerships (from the date of the Spring Finance Bill 2023) to allow PIDs to be paid partly gross and partly with tax withheld. In particular, the changes will allow a PID to be paid gross to the extent that it is the income of partners that hold gross-payment status if they held an interest in the REIT directly.
- Removing the three-property rule (from the date of Royal Asset of the Spring Finance Bill 2023) in certain circumstances. Where a REIT holds a single commercial property worth £20m or more, it will no longer be the case that the REIT must hold a minimum of three properties in order to meet the “property rental business” requirements.
- Amending the three-year development rule in relation to disposals from 1 April 2023 so that the valuation date used when calculating what constitutes a “significant development” better reflects increases in property prices.
Detailed amendments to the QAHC regime
Several detailed amendments have been announced to the QAHC regime, which came into effect from 1 April 2022, with the intention of facilitating entry to the regime of certain types of fund structures, and extending the existing anti-fragmentation rules.
The following changes will be made, with the intention of removing unintended barriers for accessing the regime:
- collective investment schemes will fall within the definition of “qualifying funds” even where they are considered corporate entities by the jurisdiction of establishment. The way that the current rules are drafted prevents certain entities that would generally be considered collective investment schemes from being “qualifying funds” (and so Category A investors). This is important because a key requirement for an entity to become a QAHC is that 70% of its investors are Category A investors. This change will have retrospective effect from 1 April 2022.
- the “investment strategy” condition (which must be met in order for an entity to become a QAHC) will be amended so that an election can be made which treats listed securities as unlisted. The effect of this amendment is that a QAHC will still be able to meet the “investment strategy” condition even if it holds listed securities. However, the QAHC will be taxable on the dividend income receivable from such securities.
Updates to the anti-fragmentation rule will be extended so as to prevent structures involving multiple QAHCs from accessing the regime, in situations where the combined percentage of relevant interests that are not held by Category A investors exceeds 30%.
Tax-advantaged share schemes
Expansion of the Seed Enterprise Investment Scheme (“SEIS”)
It has been confirmed that the package of measures announced as part of the “mini-Budget” of 23 September 2023 will be legislated for in the Finance Bill, in order to allow more companies to access the scheme and increase the funding available. The measures, which have been confirmed to take effect from 6 April 2023, are as follows:
- the investment limit for issuing companies will be raised from £150,000 to £250,000;
- the gross asset limit for issuing companies will be increased from £200,000 to £350,000;
- the age limit for a qualifying trade will be raised from 2 to 3 years; and
- the annual investor limit (on which investors may claim up to 50% income tax relief) will be doubled, from £100,000 to £200,000.
Increasing the generosity of the Company Share Option Plan (“CSOP”) regime
Similarly, the previously announced changes to the CSOP regime are confirmed to come into effect from 6 April 2023.
The limit on the value (determined at the date of grant) of options which an employee may hold under a CSOP will double from 1 April 2023, from £30,000 to £60,000.
The ‘worth having’ restriction on share classes which may be issued as part of a CSOP (which applies where a company has more than one class of share) will also be ‘eased’, in order to align the rules with those for the Enterprise Management Incentive scheme.
Simplifications to the grant of Enterprise Management Incentives (“EMI”)
New measures have been announced to simplify EMI by removing two administrative requirements, which apply when companies grant EMI options, from 6 April 2023 (although existing EMI option granted before 6 April 2023 that have not been exercised will also benefit from the changes). The company will no longer need to:
- set out within the option agreement the details of any restrictions of the share to be acquired under the option; and
- declare that an employee has signed a working time declaration, when they are issued an EMI option is issued to them.
It has separately been announced that the deadline for notifying an EMI option will be extended (it is currently 92 days from the date of grant) to 6 July following the end of the tax year. This will be legislated for separately.
Technical amendments to the Corporate Interest Restriction (“CIR”)
The CIR restricts the ability of large businesses to claim UK interest expense, to the extent that it falls to be treated as excessive pursuant to the relevant legislation.
A number of technical amendments to these rules will be made, via legislation to be included in Finance Bill 2023, and an overview of these is as follows.
The existing legislation will be amended to ensure that groups can carry forward interest allowance where a new holding company is inserted in the group part way through a period of account.
Finance Bill amendments will seek to clarify the position that notional untaxed interest income is not included in tax-EBITDA where a group has claimed double tax relief.
The new rules will ensure that brought forward Income Tax losses of a non-resident corporate landlord that is now subject to CT do not reduce tax-EBITDA, consistent with the treatment of CT losses.
Amendment will be made to remove a mismatch between tax-interest and group-interest with relevant non-lending relationships (money debts that are not a loan relationship).
Finance Bill provisions will remove a mismatch between tax-interest and group-interest where finance costs are brought into account under section 330, section 330ZA or section 607ZA of CTA 2009 by a company on the commencement of a business.
Amendment will be made to the definition of equity notes (which limit perpetual and long-dated instruments from inflating the group ratio) to extend the term to 100 years to accommodate loans that have a term of more than 50 years.
The Finance Bill will seek to ensure that capitalised interest on assets that are appropriated from trading stock is treated appropriately where the ‘alternative calculation’ election applies.
Amendments will allow interest allowance (non-consolidated investment) elections to be made for interests in certain transparent entities such as limited partnerships and property unit trusts.
There will be alignment of the deadline for making a joint public infrastructure election with the deadline for individual companies to make their public infrastructure elections.
Finance Bill provisions will seek to ensure that a building under construction for use in a UK property business is not precluded from being a qualifying asset for the public infrastructure rules.
Provision will be made to allow certain finance costs payable by an infrastructure company to be deductible where they are payable to third parties via an overseas group company.
There will be clarification of the circumstances in which separate CIR groups may arise under the special rules for investment managers.
The definition of a CIR group where assets are held for sale or distribution to shareholders will be revised.
The time limit for HMRC to appoint a reporting company will be extended by 12 months.
A group will be required to submit a revised Interest Restriction Return whenever the figures have changed and HMRC will have the power to issue a penalty when such a return is not submitted.
The power for HMRC to issue determinations where there is no appointed reporting company will be removed.
The additional time provided to make group relief and capital allowances claims following a determination made by HMRC when a group has failed to file an Interest Restriction Return will be removed.
The meaning of insurance company will be revised so all relevant entities are within scope, following a change made to other legislation in consequence of EU Exit.
The Finance Bill will provide that changes to CIR disallowances are ignored in calculating corporation tax inaccuracy penalties.
There will be clarification that companies which are charities cannot benefit from tax relief for financing costs incurred in respect of their tax-exempt activities and, as a result, avoid the need for these amounts to be included in CIR calculations.
Finally, under the worldwide debt cap rules at Part 7 of TIOPA 2010, amendment will be made to treat a revised statement of allocated disallowances submitted within the 30-day window (for example, following the closure of an enquiry into a company tax return or litigation settlement) as valid only if a valid revised statement of allocated exemptions is also submitted within that window.
Transfer pricing documentation
Changes will be introduced as regards transfer pricing documentation, with effect for accounting periods commencing on or after 1 April 2023 for corporation tax purposes and with effect for the 24/25 tax year and subsequent tax years for income tax purposes.
New regulations will stipulate that the master file and local file documents must be kept and preserved. Amendments will also ensure that an information notice can specify transfer pricing documentation and to ensure that transfer pricing documents can be requested outside an enquiry. Further, there will no longer be a requirement for the documents to be in the ‘possession or power’ of any individual entity, in circumstances where there are in the ‘possession or power’ of another group entity.
Further, amendment will be made to ensure that deficiencies in record keeping or production of records on request lead to a rebuttable presumption that an inaccuracy in the application of the transfer pricing rules is careless.
Restriction on charitable reliefs to UK charities
Draft legislation has been published which will effectively exclude EU and EEA charities from the definition of a charity for UK tax purposes.
Broadly, not only will this mean that only UK charities will be able to qualify for UK charitable tax reliefs, but the legislation will also prevent EU and EEA charities from being qualifying investors for the REIT and QAHC regimes and the Exempt Unauthorised Unit Trust (“EUUT”) rules.
For charities which have not asserted their status as a charity by 15 March 2023 (by making a valid claim to HMRC in reliance on charity status), the amendment takes effect from 15 March 2023, meaning that such charities will immediately be denied tax reliefs. In order to soften the impact of the amendment for those who have asserted such status, the draft legislation envisages the amendments coming into force at various later dates during a transition period, depending on the tax relief in question.
Additionally, the amendment will not have effect in respect of interests held prior to 15 March 2023 in determining whether or not a charity is a qualifying investor (for the REIT, QAHC or EUUT rules) on an ongoing basis.
Amendments with a similar purpose will also be made to the definition of a Community Amateur Sports Club.
Write down for annuities products and insurers’ liabilities
It was announced today that the Finance Bill will include measures relating to insurers in financial distress which have their liabilities written down by a court. It will also apply to individuals holding annuities provided by insurers which experience financial distress. In both cases the aim is to avoid adverse tax consequences which could otherwise arise.
From an insurer’s perspective, the effect of the change will be that a write-down of an insurer’s liabilities under section 377A of the Financial Services and Markets Act 2000 will not be taxable. In the event of a subsequent write-up (or court ordered variation of a write-down), the amount that was not brought into tax as a result of the write-down will not be given as a deduction.
Secondary legislation will ensure that write-downs in respect of various annuities under a registered pension scheme are not considered a surrender of benefits, and that any subsequent Financial Services Compensation Scheme top-ups are treated as authorised payments, to prevent unauthorised payments charges being incurred.
Elective accruals basis of taxation for carried interest
It was announced today that the Spring Finance Bill 2023 will provide a new elective basis of taxation for carried interest, enabling UK resident investment managers to accelerate their tax liabilities in order to align their timing with that applicable in other jurisdictions, where they may obtain double taxation relief.
The election would lead to them being taxed on the basis of the amount that has accrued to them in the current tax year, calculated on a prescribed basis, rather than on the time at which it arises.
The new rules will apply for tax year 2022 to 2023 and subsequent tax years.