The most significant changes made were to the rates of R&D tax reliefs and in the area of windfall taxes. Several thresholds are being maintained and there is confirmation of the start date for the UK’s Pillar Two rules. The Government has also decided not to process with an online sales tax.
Research and development (“R&D) tax relief
As part of the ongoing review of the R&D reliefs, the Government is reforming these reliefs. According to the Chancellor’s speech and accompanying documents, there is significant error and fraud in the small and medium-sized enterprises (“SME”) scheme, with the generosity of the relief making it a target for fraud. By contrast, the separate R&D expenditure credit (“RDEC”) under the “large” regime is better value but has a rate that is less internationally competitive. The Government is therefore “rebalancing” the rates of each relief.
For qualifying expenditure on or after 1 April 2023, the SME additional deduction will decrease from 130 percent to 86 percent, and the SME payable tax credit rate will decrease from 14.5 percent to 10 percent. However, the taxable RDEC rate for claims under the “large” regime will increase from 13 percent to 20 percent.
According to the Government, this reform is a step towards a simplified, single RDEC-like scheme for all which the Government will consult on including considering whether further support is necessary for R&D intensive SMEs.
For companies continuing to pay corporation tax (“CT”) at 19 percent, the rate of saving for every £1 of qualifying R&D revenue expenditure from 1 April 2023 will fall from 24.7 pence per pound to 16.34 pence whilst companies paying corporation tax of 25 percent from 1 April 2023 will see a fall from 24.7 pence per pound to 21.5 pence per pound.
Companies claiming under the “large” regime and paying corporation tax at 19 percent will see an increase in the rate of saving from 10.53 pence per pound to 16.2 pence per pound with companies paying corporation tax at 25 percent from 1 April 2023 seeing an increase from 10.53 pence to 15 pence.
As previously announced at Autumn Budget 2021, R&D tax reliefs will be reformed by expanding qualifying expenditure to include data and cloud costs, as recommended by this Institute. These changes will be legislated for in Spring Finance Bill 2023.
Creative industry tax reliefs
The Government is also seeking to build upon the success of the audio-visual subset of the creative industry tax reliefs, covering film, animation, high-end TV, children’s TV and video games. A consultation has now been opened on a series of proposals to incentivise the production of culturally British content.
Employer’s NICs and VAT thresholds
The employer’s NICs threshold will be maintained at its current level of £9,100 until April 2028 and the employer’s allowance will remain at £5,000.
The current VAT registration and deregistration thresholds of £85,000 and £83,000 respectively will stay at these levels until the end of March 2026.
Online sales tax
Following consultation, the Government has decided not to introduce an online sales tax (“OST”). This decision reflects concerns raised about an OST’s complexity and the risk of creating unintended distortion or unfair outcomes between different business models. A response to the OST consultation will be published shortly.
Bank surcharge and diverted profits tax
Following the decision to proceed with the CT rate increase to 25 percent from April 2023, the changes to the bank CT surcharge which are legislated to take effect from the same point will also go ahead. This means that from April 2023, banks will be charged an additional 3 percent rate on their profits above £100 million.
From April 2023, the rate of diverted profits tax will increase from 25 percent to 31 percent, in order to retain a 6 percentage points differential above the main rate of CT.
OECD Pillar Two rules
And finally, it is confirmed that the Government will implement the OECD Pillar 2 rules, to deliver a global minimum CT rate of 15 percent, for accounting periods beginning on or after 31 December 2023. This will be legislated for in Spring Finance Bill 2023.
As part of this, the Government will:-
- Introduce an Income Inclusion Rule (“IIR”) which will require large UK headquartered multinational groups to pay a top-up tax where their foreign operations have an effective tax rate of less than 15 percent; and
- Introduce a supplementary 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 percent;
Both the IIR and QDMTT will incorporate the substance based income exclusion that formed part of the G20 OECD agreement. The substance based income exclusion reduces exposure to the minimum tax and is calculated as a percentage mark-up on tangible assets and payroll costs.
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