Scottish businesses can count on good advice with taxing issues

After much speculation over the preceding weeks, the Chancellor of the Exchequer Jeremy Hunt presented his Autumn Statement on November 17, setting out ambitious  plans to tackle the cost-of-living crisis and rebuild the UK economy. 

This was the third major fiscal announcement by a Chancellor within two months. It both confirmed some of the reversals of the Mini-Budget delivered by Hunt’s predecessor, Kwasi Kwarteng, and introduced a number of new measures to help support the economy and plug the gap in the public finances. 

The Chancellor set out additional support to address the cost-of-living crisis and amongst other measures he confirmed that key benefits such as universal credit and the state pension will rise by the rate of inflation of 10.1 per cent next year, whilst the national living wage will increase by 9.7 per cent to £10.42 per hour from April 1 2023.

He also confirmed that the energy price guarantee will be extended after 31 March 2023, albeit at a higher price cap for the typical household of £3,000 per year until April 2024. 

Overall, the Chancellor explained that of the £55 billion required to repair the economy, half will be financed from spending cuts, and the other half from tax increases. 
Here, we focus on the tax changes. 

FISCAL DRAG
A KEY part of the increase in the government’s tax take over the next five years will be realised through “fiscal drag”. This will be achieved by freezing key tax allowances and tax bands, such as the income tax basic rate band, national insurance thresholds, the VAT registration threshold and the inheritance tax allowance until March 31 2028 while wages and inflation increase. 

This will result in bringing more people into taxation, or into higher rates of taxation, and therefore significantly increasing the total tax collected.

LOWER THRESHOLD FOR 45 
PER CENT INCOME TAX RATE
FOLLOWING the surprise announcement in September’s Mini-Budget to remove the additional rate of income tax of 45%, Jeremy Hunt reconfirmed in the Autumn Statement that this decision has been reversed.

In fact, he went one step further and reduced the additional rate tax threshold from £150,000 to £125,140 for taxpayers in England, Wales and Northern Ireland.

This now means that the threshold at which the additional rate of tax kicks in is aligned with the threshold at which the personal allowance has been fully lost. 

The Scottish Budget is due to be delivered on 15 December 2022, so it will be interesting to see if the devolved administration chooses to adopt the same approach to the additional rate threshold as the rest of the UK, and indeed whether the additional rate of tax on earned income in Scotland will remain higher than the rest of the UK at 46 per cent.

NATIONAL INSURANCE
IN addition to the freezing of the National Insurance Contribution (NIC) thresholds, the Autumn Statement confirmed that the NIC rates for 2023/24 and beyond will not be affected by the proposed Health and Social Care Levy, which was scrapped in the Mini-Budget. So, the more familiar rates of 12 per cent / two per cent for employees and 13.8 per cent for employers will apply from 06 November 2022, with some transitional adjustments in the 2022/23 tax year.

DIVIDEND RATES AND ALLOWANCES
UNLIKE the position for NICs, the 1.25 percentage point increase in dividend tax rates has not been scrapped, although it takes the form of income tax as opposed to a separate levy.

The 2022/23 dividend tax rates of 8.75 per cent, 33.75 per cent and 39.35 per cent will therefore be maintained for 2023/24 and future tax years.

Coupled with this, widely anticipated changes to the dividend allowance were also announced: the dividend allowance will now reduce from £2,000 to £1,000 in 2023/24 and then to £500 for 2024/25 onwards, which will bring more taxpayers within the scope of paying tax on their dividend income.

CAPITAL GAINS TAX EXEMPTION REDUCED
WHILST speculation about increases to Capital Gains Tax (CGT) rates did not materialise, there were still changes to CGT which means that significantly more taxpayers will have to pay the tax in the future.

The current annual exemption for CGT of £12,300 will be reduced to £6,000 from 06 April 2023 and then to £3,000 from 06 April 2024.

This means additional CGT of up to £1,764 from April 2023 and £2,604 from April 2024 on gains of £12,300 or more. It also means that many more people may have to complete self-assessment tax returns because of the changes, where previously they didn’t because their gains were below the £12,300 exemption.

STAMP DUTY LAND TAX – TEMPORARY REDUCTION
INCREASES to Stamp Duty Land Tax (SDLT) thresholds for purchases of residential property in England and Northern Ireland were previously announced in the Mini-Budget, but the Chancellor has now confirmed that this is only going to be a temporary measure.

The increases were £125,000 to £250,000 for the nil-rate threshold, £300,000 to £425,000 for the first-time buyer nil-rate threshold and £500,000 to £625,000 for the maximum purchase price for which First Time Buyers’ Relief can be claimed. 

These increases will revert to the pre-23 September 2022 thresholds on 01 April 2025.

This means SDLT due on purchases of residential property in England and Northern Ireland will increase again after March 31 2025.

CORPORATION TAX – MAIN RATE INCREASING TO 25 PER CENT
IT was confirmed that the planned increase in the corporation tax rate to 25 per cent for companies with profits over £250,000 will go ahead from 01 April 2023.

Companies with profits below £50,000 will continue to pay corporation tax at 19 per cent with a tapered rate between the two profit limits.

The limits are subject to the reintroduction of the concept of “associated companies” which means group structures and companies owned separately but by the same shareholders will need to be taken into account when considering the lower threshold.

Companies that are regarded as “close investment holding companies” will also pay at the main rate of 25 per cent whatever the profit level. These are primarily companies holding investment portfolios, or companies with rental properties where they are let to related parties. 

CAPITAL SPEND
THERE were no reversals to the Annual Investment Allowance (AIA) threshold which was set permanently at £1 million in the Mini-Budget. 

This means that most small and medium businesses will still get 100 per cent tax relief on their spend on plant and machinery, and 50 per cent relief on any qualifying fixtures, subject to the £1 million limit even as the super-deduction starts to be withdrawn. The super-deduction, which allows companies to claim capital allowances at a rate of 130 per cent on qualifying plant and 50 per cent on fixtures, will finish on March 31 2023.

Assets bought in a corporation tax period ending after March 31 2023 (but acquired before the end date) will benefit from a reduced super-deduction. 

So, if your company’s year end is December 31 2023, the super-deduction reduces from 130 per cent to 107.4 per cent, however the tax relief on capital allowances increases with the higher corporation tax rate which makes this more complex to consider.

If you are thinking of making significant capital spend you should seek professional advice as to whether the timing of that spend could affect when the tax relief is due.

RESEARCH AND DEVELOPMENT (R&D) TAX CREDITS 
THOUGH there were numerous comments by the Chancellor regarding Research and Development (R&D), with a refocus of investment zones and direct funding for R&D, there were significant reductions announced to the tax relief companies can claim for R&D expenditure. This move appears to have been led by the Chancellor’s concern of abuse and fraud in claims under the scheme by small and medium sized enterprises (SMEs). 

On expenditure incurred after April 1 2023 under the SME scheme, relief can only be claimed at 86 per cent of the qualifying spend compared to 130 per cent previously. This means that if your company has incurred £100 of qualifying spend it will only get additional relief of £86 rather than £130.

The negative effect is reduced by the increase in corporation tax rate but means £100 of R&D spend reduces the corporation tax payable by £21.50 compared to £24.70 previously, assuming tax payable going forward at the full rate of 25 per cent.

For loss-making companies who can claim cash back by surrendering the loss created by R&D expenditure, the credit you can claim has reduced from 14.5 per cent to 10 per cent which further increases the impact. This means that whereas previously you could have reclaimed 33.3 per cent of the cash spent on R&D back, a company can now only reclaim 18.6 per cent.

For larger companies the news is more positive as the Research and Development Expenditure Credit (RDEC) rate is increasing from 13 per cent to 20 per cent.  This scheme is not as generous as the SME one but the combined effect of the changes brings the two schemes closer together and is a step towards the government’s aim of having just one scheme. There will be consultations on this.
 

ELECTRIC VEHICLES
FROM April 2025 electric vehicles will begin to pay vehicle excise duty and rates will be in line with petrol and diesel cars.

The company car tax rates will increase by one per cent for each of the next three years up to a maximum of 5 per cent for fully electric cars and 21 per cent for ultra-low emission cars.

This is still significantly lower than the rate for cars with higher CO2 emissions and means that providing an electric car through the business could still make tax sense, especially after taking into account the capital allowances that can be claimed. 

It was also announced that the 100 per cent first year allowance on electric vehicle charging points will be extended until March 31 or April 5 2025 to continue incentivising businesses to invest in them.

OFF-PAYROLL WORKING
THE off-payroll working rules which have been in place since April 2021 will remain in place, as previously stated by Jeremy Hunt in October.
This means that medium and large organisations, plus public sector bodies, who engage workers via personal service companies are responsible for deciding employment status.

ENERGY PROFITS LEVY (EPL) AND ELECTRICITY GENERATOR LEVY
FINALLY, the single biggest tax raising measure announced was the confirmation of additional windfall taxes imposed on the energy sector. 
From 01 January 2023, the EPL rate will rise by 10 percentage points to 35 per cent.

The investment allowance will be reduced to 29 per cent for all investment expenditure, other than decarbonisation expenditure.

The levy is then set to end on March 31 2028.

A temporary 45 per cent tax will be levied on extraordinary returns from low-carbon UK electricity generation. 

This will also apply from January 1 2023. 

Tax advisors at AAB are on hand to answers your questions about how the taxation changes announced will affect you and your business.
aab.co.uk