With a general election due in the next year or so, the 2023 Autumn Statement was always more likely to produce tax cuts than tax increases. Or, more accurately: more likely to produce tax cuts than further tax increases: don’t forget that ‘fiscal drag’ (the effect of freezing allowances and tax bands at 2021 levels rather than increasing them with inflation) continues to generate billions in additional annual tax revenues. And tax cuts it duly produced. But that’s not the whole story…
Individuals benefit by a 2% cut in National Insurance contributions (NICs) for employees and a 1% cut for the self-employed – together with abolishing the Class 2 contribution, which has been an archaism ever since the physical stamp was abolished when Adam was a lad. Nothing for employers though – employers’ NIC (in substance a tax on employing people, which we’ve always found curious) remains 13.8%.
Companies see ‘full expensing’ (100% capital allowances) for most capital expenditure on plant and machinery continued indefinitely. That isn’t available to other businesses such as sole traders and partnerships: but since those businesses can get Annual Investment Allowance on up to £1m of expenditure, the practical effect is in many cases the same.
But as always, the interesting bits are to be found not in what the Chancellor said but in the many documents published alongside the Autumn Statement. Nor are they just matters of technical interest to tax nerds (though there are some of those): they also contain details of some changes or proposals which may be of great practical importance. We note some of the latter below (while resisting the temptation to share the former):
Capital allowances
Alongside the entrenchment of ‘full expensing’ there is to be a ‘technical consultation on wider changes to the capital allowances legislation, as the introduction of permanent full expensing provides [HMRC] with an opportunity to deliver on the government’s longer-term ambition to simplify the tax system’.
The consultation will focus only on allowances for plant and machinery and won’t consider reforms to other capital allowances; nor will it extend the scope of expenditure eligible for capital allowances. Rather, it will see whether changes can be made to simplify the system. Limited, then, but potentially useful.
R&D tax relief
As expected, the existing two R&D tax relief schemes are to be merged, but with effect for accounting periods beginning on or after 1 April 2024, with a 20% credit available. Where a company is loss-making, the credit is not repaid in full but tax is withheld and generally carried forward for relief against future tax liabilities. The rate of this withholding is to be set at the small profit rate of 19%.
It was also confirmed that ‘R&D intensive’ SMEs will continue to benefit from an enhanced R&D tax credit, calculated in accordance with the existing SME regime at an effective rate of 27%. A company is R&D intensive if, broadly, over 30% of its tax-deductible expenses qualify as R&D.
HMRC are also legislating to prevent R&D tax credits being repaid to third parties, no doubt in a further attempt to mitigate fraud in this area.
Tax reporting and the ‘cash basis’
Currently, tax law requires business profits to be computed on an ‘accruals’ basis in accordance with generally accepted accounting practice (so taking account of debtors, creditors, unbilled work and so on). In some circumstances (including in particular having a modest enough turnover) most individuals and partnerships (but not companies or LLPs) can elect to be taxed on a ‘cash basis’.
From 2024/25 the position is reversed: ‘cash basis’ will be the default regardless of turnover (but still excluding companies and LLPs). At the same time, the rules on cash basis deductions (in particular the restriction of tax relief for interest paid, which has never made much sense, and the rules on offsetting losses) will be relaxed to make cash basis less cumbersome.
Part of the reason for the change is what HMRC euphemistically describe as ‘the behaviour of many businesses that currently use the cash basis without officially electing to do so’. A good change, which will simplify tax reporting.
‘Off-payroll working’ rules
The ‘off-payroll working’ rules require PAYE to be operated in certain cases where individuals who would be employees if engaged directly provide their services through an intermediary. One point of friction is that if it is found that the rules have not been applied as they should, the engager is responsible for accounting under PAYE for the full amount of tax due on the payments in question and HMRC are usually obliged to pay back to the intermediary any tax which the intermediary (in what turns out to be the mistaken belief that it was trading income) has paid.
This is to be changed: from 2024/25, HMRC will be able to offset against the engager’s PAYE liability the amount of any payments made by the intermediary, rather than repaying them to the intermediary. Much fairer.
EIS and VCT
The Enterprise Investment Scheme and Venture Capital Trust scheme each contained ‘sunset’ clauses bringing them to an end on 5 April 2025. The sunset has now been deferred ten years until 5 April 2035. Again, a good change.
ISAs
There are some changes to Individual Savings Accounts (‘ISAs’) from 6 April 2024, the most significant of which is that it will be possible, within the relevant annual investment limits, to split the investment between multiple ISAs of the same type.
HMRC powers
From 2025/26, HMRC will be empowered to require you to provide more information on your self-assessment tax return. Crucially, this may include information that is not necessary to calculate your own tax liability but is information that HMRC consider ‘relevant for the purpose of the collection and management of [anyone’s] income tax or capital gains tax’.
At present, HMRC say that they intend to use the power to require shareholders in owner-managed businesses to state the amount of dividend income received from their own companies separately to other dividend income, and the percentage share they hold in their own companies; and to require self-employed people to provide information on start and end dates of self-employment. But in principle, HMRC could demand you tell them how much you paid your window-cleaner in cash in the tax year; or who you paid, and how much, for that building work you had carried out in the year. Outrageous.
Construction Industry Scheme
Following consultation earlier this year, some changes will be made to the tests for ‘gross payment’ status under the Construction Industry Scheme (‘CIS’). From 6 April 2024, VAT will be added to the list of taxes in regard to which contractors will need to demonstrate compliance if they are to be granted and keep gross payment status. Fair enough.
More positively, most payments from landlords to tenants will be removed from the scope of the CIS.
Real Estate Investment Trusts
There are some changes to the law on Real Estate Investment Trusts (‘REITs’). They verge upon ‘of interest only to nerds’ territory: but we mention them here because they may in some cases be of real significance. So we compromise: they’re not of sufficiently general interest for us to list them in this note, but if you manage a REIT, talk to us.
For more information on the tax implications of the Autumn Statement measures for you or your business, please get in touch with your usual BKL contact or use our enquiry form.