Autumn Statement 2023
The Chancellor of the Exchequer delivered a far more positive and optimistic Autumn Statement than would have been expected even a few weeks ago. With a recent fall in inflation figures, and in light of improved debt and borrowing forecasts, the Chancellor focused on the economic progress made this year, and plans to use his newly found fiscal headroom to support growth and make work pay.
For businesses, the most significant tax measure was the announcement that “full expensing” – the ability for companies to get a full tax deduction for qualifying plant and machinery – would be made permanent. For the employed and self-employed, the most significant announcements related to reductions in National Insurance Contributions. A whole host of other tax and non-tax measures were also announced either in the speech or the raft of accompanying documents.
Several possible tax measures floated in the press in the lead up to the statement, most significantly to Inheritance Tax and Stamp Duty Land Tax, were nowhere to be seen. The Chancellor must now hope that the strength of the economy continues its current trajectory, and that he is able to make further announcements in the spring, in what will almost certainly be his last opportunity before a general election.
Full expensing of capital expenditure
First announced in the 2023 Spring Budget, full expensing replaced the temporary super-deduction for capital expenditure which ended on 31 March 2023. It gives companies full uncapped tax relief (“full expensing”) for qualifying capital expenditure, and was originally introduced for expenditure incurred between 1 April 2023 and 31 March 2026. The government has now announced this will be made permanent, providing capital intensive businesses with a new level of certainty. Qualifying capital expenditure for these rules is, broadly, expenditure on new plant and machinery. The rules also incorporate a 50% first-year allowance for “special rate pool expenditure”, which includes integral features in a building, such as electrical systems.
Moore Kingston Smith comment:
Hailed by the Chancellor as the biggest tax cut in history, this measure will be warmly welcomed by many UK businesses. It is disappointing that it remains available exclusively to companies and not unincorporated businesses; it could be said the government has missed the opportunity to support a wider spectrum of the UK economy.
National insurance contributions (NICs) for the self employed
Self employed individuals (sole traders and partners) currently pay Class 2 and Class 4 NICs.
Class 2 NICs is currently payable at a flat rate of £3.45 per week and contributes to an individual’s eligibility for certain state benefits. Class 4 NICs is payable at 9% on profits between £12,570 and £50,270, and at 2% thereafter. The Chancellor announced that Class 2 NICs will be abolished from 2024/25, with eligibility for state benefits being dealt with through the Class 4 NIC regime (although those with annual profits below £6,725 will still be able to make voluntary contributions of £3.45 per week to continue accruing entitlement to state benefits). The rate of Class 4 NICs on profits between £12,570 and £50,270 will fall from 9% to 8%.
Moore Kingston Smith comment:
While the abolition of Class 2 NICs should bring simplification for individuals, it is imperative that HMRC’s records and systems are robust enough to identify effectively under the new regime when self employed individuals are entitled to credits towards state benefits.
The Class 4 NIC thresholds are not set to increase until at least April 2028, meaning the effect of fiscal drag must be considered alongside the reduction in the rate of Class 4 NICs.
Class 1 National insurance contributions (NICs)
The main rate of Class 1 National Insurance Contributions (NICs) paid by employees will be cut from 12% to 10% with effect from 6 January 2024. This main rate applies to earnings between the primary threshold (£1,048 per month) and the upper earnings limit (£4,189 per month). The primary threshold and the upper earning limit will themselves be maintained at their current levels until at least 2027/28. There are no proposed changes to the rates of employer’s Class 1 NICs.
For an employee earning £35,000 per annum, the reduction will be worth approximately £37 per month, while for an employee earning £63,000 per annum the saving will be approximately £62 per month.
Moore Kingston Smith comment:
It is clearly good news for employees that the rate of NICs is being cut, although for some the benefit will be eroded by the fact that the primary threshold will remain the same for the next few years. Employers will need to ensure their payroll systems are updated in time for this change from 6 January 2024.
Research & Development Tax Relief
The government made several announcements around R&D tax relief:
Merged R&D Scheme
The Chancellor announced that a merged R&D tax relief scheme, proposed earlier in 2023, will be introduced from 1 April 2024. This single scheme will be based on the current RDEC scheme which is most relevant to large companies. One change to the original proposal concerns the amount that will be paid out to loss-making companies; the notional tax withheld from the expenditure credit will be calculated at a rate of 19% rather than 25%, enhancing the net benefit of the scheme for loss-making companies from 15% to 16.2% of qualifying expenses. Clarifications were provided for the treatment of R&D projects within a supply chain, and the treatment of grant-funded or subsidised R&D projects.
R&D intensive SMEs
As previously announced, even following the introduction of a merged scheme, “R&D intensive SMEs” that make losses will continue to benefit from a generous “repayable tax credit” regime. Whether an SME is “R&D intensive” will be determined on the level of expenditure that relates to R&D, and it was announced that the relevant threshold will be reduced from 40% to 30%. There will also be a grace period for companies whose expenditure fluctuates around the threshold.
Moore Kingston Smith comment:
It is disappointing that the merged R&D scheme is being introduced in 2024 when delaying this for a year would allow various concerns and shortcomings to be resolved. The measures relating to R&D intensive SMEs, while beneficial for some, means the regime will retain an element of complexity, giving rise to unwelcome uncertainty for some businesses on the borderline of eligibility for this part of the regime.
Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT)
The EIS and VCT regimes both provide tax incentives designed to encourage investment in smaller, riskier, trading companies. The legislation for both regimes was due to expire in 2025, but the government has announced these will be extended by ten years to 6 April 2035. This will allow the continued availability of both Income Tax and Capital Gains Tax reliefs for individuals making qualifying investments.
Moore Kingston Smith comment:
This welcome extension will provide our entrepreneurial business clients with the continued ability to raise early-stage funding and allow individual investors to continue to support these businesses in a tax efficient manner.
Making Tax Digital
A key part of the government’s plan to modernise the UK’s tax system, Making Tax Digital (MTD), was first announced in 2015. While it has been fully introduced for VAT purposes, its implementation for Income Tax purposes (MTD for ITSA) has seen multiple delays. The most recent delay in December 2022 saw the government announce a review of the implementation of the proposed regime (particularly as it affects smaller businesses). The outcome has now been published, with the government confirming it will proceed with the mandatory introduction of MTD for ITSA for sole traders and landlords with income over £50,000 from April 2026, followed by those with income over £30,000 in April 2027. Whether it will be mandated for those with income below £30,000 will remain under review. Several changes to the regime’s detailed design have been announced, intended to simplify, and make it more workable for all businesses. Draft regulations incorporating these changes will be published shortly for technical consultation.
Moore Kingston Smith comment:
The changes to MTD for ITSA include the removal of the need to file End of Period Statements, and easements for landlords with jointly-owned property. On the face of it, these are to be welcomed and demonstrate the government has listened to feedback. However, these changes are minor and do not significantly change the general shape of the regime. The requirement to submit quarterly reports, while altered slightly, remains in place. A more fundamental review of the proposals would have been preferable to the tinkering that has been announced.
Construction Industry Scheme
Following a consultation earlier in the year, the government will introduce reforms to the Construction Industry Scheme. These largely relate to Gross Payment Status (i.e., the ability for a contractor to pay a subcontractor with no deduction of tax). VAT compliance will now be considered in determining whether the Gross Payment Status (GPS) is available, and HMRC will have more power to remove the status immediately in cases of fraud. The government also announced simplifications to other aspects of the scheme, which will be subject to technical consultation.
Moore Kingston Smith comment:
The UK government remains steadfast in its commitment to tackling tax fraud, and the key changes here reflect this. The welcome simplification measures will cut down on some unnecessary complexities.
Off Payroll Working (IR35)
The government confirmed that it will legislate to allow HMRC to reduce PAYE liabilities where “deemed employers” are assessed to tax after having made errors under the off-payroll working rules, where the worker and/or their intermediary has already made certain tax payments.
The off payroll working rules (commonly referred to as IR35) are designed to ensure that individuals that work like employees, but that operate through their own companies, pay the appropriate taxes. Current legislation does not allow HMRC to set off amounts of tax already paid by a worker and their intermediary against PAYE that is subsequently assessed on the deemed employer. Instead, where a worker and their intermediary have paid tax on income that should have been subject to the off-payroll working rules, they may be entitled to claim a repayment for amounts they have overpaid.
Moore Kingston Smith comment:
This change will help to alleviate some of the financial burden and risk that organisations encounter because of the off payroll working rules when engaging contractors, and to reduce complexity for the workers themselves. However, other fundamental complexities within the rules persist, particularly those relating to determining employment status.
Expansion of the cash basis
The government previously consulted on a number of changes it was considering making to the cash basis, under which unincorporated businesses calculate their taxable profits with reference to cash movements, rather than profits calculated under the traditional accruals basis. The consultation closed on 7 June 2023 and the government has now announced some significant changes, including the complete removal of the turnover eligibility threshold (currently £150,000), the restriction on interest costs (currently £500), and the loss relief restrictions. It is also expected that the cash basis will become the default method of calculating trading profits, subject to possibility of making an election to use the accruals basis instead.
Moore Kingston Smith comment:
The removal of various restrictions currently in place in respect of the cash basis is to be welcomed, although we have some concerns over the proposal for this to become the default way of calculating trading profits for unincorporated businesses; the cash basis provides a useful simplification for smaller businesses, but for larger and more complicated businesses it will always result in a less accurate understanding of a business’s financial performance.
Tax simplification
Following the abolition of the Office of Tax Simplification, the government is purportedly seeking to integrate tax simplification into tax policy. Several of today’s announcements reflect this, including the abolition of Class 2 NICs and the extension of full expensing. In addition to these, which are covered elsewhere, the government announced that it would remove the requirement for those with only PAYE income to submit tax returns (regardless of the level of this income), which is expected to remove 338,000 taxpayers from the tax return system.
Moore Kingston Smith comment:
While it is promising to see simplification on the agenda, a lot more can be done in this area. We would like to see the government taking a more systematic approach to simplify and rationalise the tax system.
Investment Zones
The idea of Investment Zones was originally floated by Kwasi Kwarteng in September 2022, and the current Chancellor confirmed in March 2023 that he intended to introduce 12 such zones, with the aim of focusing certain tax and other incentives on high-potential industry sectors in regions in need of levelling-up. He has now announced the programme will be extended from five to ten years in England, with steps being taken to facilitate a similar extension in Scotland and Wales. At the same time, there will be an increase in the value of incentives being offered. Areas within Greater Manchester, the West Midlands, and the East Midlands were announced as England’s next investment zones.
Moore Kingston Smith comment:
The extension to this policy will provide some additional certainty to those looking to invest in the selected regions – something to be welcomed. The extent to which the programme simply shifts economic activity within the UK, and to which it stimulates activity that would otherwise not occur in the UK, will require examining over the longer term.
Investment in HMRC debt recovery
The government announced it is investing a further £163 million to improve HMRC’s ability to manage tax debts. This is intended to help them better distinguish between those who can afford to settle their tax debts but choose not to and those who are temporarily unable to pay and need support, and to target more effectively those in the first category.
Moore Kingston Smith comment:
Historically, HMRC have applied a ‘one size fits all’ approach to recovering tax debt, and improvements to its processes in this area will be greatly welcomed. It is essential that businesses with a temporary issue paying their taxes should be given time to get their affairs back on track and distinguished from those that simply choose not to pay. It is pleasing to see an increase in investment in HMRC, although the forecasts who that £163m of investment by government will increase tax collection by £4.7bn between now and April 2019 which feels like an overly optimistic return on investment.
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