UK Autumn Statement 2023 - the Conservative election strategy takes shape
22 November 2023 | Applicable law: England and Wales
It is traditional for the delivery of the Autumn Statement to be preceded by frenzied speculation with different headline-grabbing tax cuts and giveaways jockeying for position in the national press– and this year was no exception.
A cut in, or the abolition, of inheritance tax was the early front runner, but towards the end of last week cuts in National Insurance Contributions (NICs) had come up on the rail. By the weekend, this in turn seemed to have been pipped to the post by income tax cuts. In the end, though, it was NICs that were the object of the Chancellor's limited largesse. Observers hoping for substantial changes might find themselves a little disappointed by what Mr Hunt had to announce today. Aside from some tinkering with NICs, the landscape for individual taxpayers remains largely unaffected.
No doubt the Chancellor felt hemmed in by the economic reality that cuts to income tax are inflationary, leaving him little room for manoeuvre. But the absence of much good news on the personal tax front did lead to the curious spectacle of Labour's Rachel Reeves criticising Mr Hunt for not having cut taxes more.
Nevertheless, with tax rates frozen across the board in this year's Spring Statement, the effect of fiscal drag, where more taxpayers are pulled into higher rates of taxation due to inflation and which more and more people seem to have woken up to in recent months, has been to allow the Chancellor the fiscal headroom for a few headline spending pledges, particularly in industries such as life sciences and AI.
With an election expected towards the end of 2024, today's Autumn Statement must be seen in the wider context of the Conservatives' natural priority to win an election and no doubt some rabbits remain in the hat for 2024 (in the face of, it would seem). Over the last few days there has been widespread speculation (or strategic trialling?) about a potential halving of the rate of inheritance tax, from 40% to 20%, yet in the 120-page Autumn Statement the word 'inheritance' appears not once. We should now expect a dramatic change to inheritance tax to feature either in the next March Budget or in the Conservatives' manifesto for the next general election.
Those with good memories will recall the Prime Minister announcing as recently as March 2022, in his former role as Chancellor, his intention to cut the basic rate of income tax from 20% to 19% before the end of the current Parliament in 2024. There is still time to implement this, and we expect that it too could form part of a pre-election tax giveaway designed to heap pressure on Labour.
Leaving to one side what the Chancellor did not announce, along with what he might be holding back for his big election push next year, there were a few announcements of note for individuals and business when it comes to taxation.
The Chancellor has spent £9bn cutting the Class 1 rate of National Insurance from 12% to 10% from 6 January. This is paid by employees on earnings between £242 and £967 a week. The Class 4 rate paid by self-employed persons was also cut by 1% from 9% to 8%, from April next year. Class 2 NICs paid by the self-employed earning more than £12,570 at a rate of £3.45 a week are abolished.
Cuts to NICs are deemed to be less inflationary than cuts to income tax, perhaps because the system is more obscure and less understood. As Jeremy Hunt said "It is one most people haven’t heard of, but it is a big deal for those who have to pay it but will still have the welcome effect of increasing take home pay for "the people who literally kept our country running during the pandemic. The plumbers who fixed our boilers in lockdowns. The delivery drivers who brought us our shopping. The farmers who kept food on our plates."
Jeremy Hunt also took the opportunity to boost his standing in the eyes of business by making permanent the full expensing regime introduced earlier this year and which he described as "the largest tax cut in history", as to which there is more detail below. This, combined with a number of more targeted measures, allowed him to set out his stall as the pro-business Chancellor, a mantle that Rachel Reeves has been increasingly looking to assume. In addition to the full expensing, we cover two further key measures below – namely the business rates and R&D tax relief announcements.
For many decades, the UK has not generally permitted the direct and immediate offset of capital costs against taxable operating revenues in the context of either general trading activities or commercial property activities. The UK Government had previously announced a significant temporary relaxation of this traditional policy, but that temporary measure is now made permanent. In principle, this means that the entire acquisition cost of a capital item acquired for business purposes will be capable of full and immediate deduction from general revenues arising in the period in which the cost is incurred. This is intended to enable the Government to simplify the complex existing system of capital allowances under which prescribed fractions of capital expenditure are often permitted as partial deductions against periodic revenues over time.
However, the new proposal for permanent "full expensing" of the capital costs of a business is perhaps slightly misleading, as the proposed new approach would not apply to certain designated classes of business asset (such as cars), it would not initially apply to any assets of any kind that are used in leasing arrangements (although extension of the new approach to such situations will now become the subject of separate consultation about further possible reform), and it would not apply to any so-called "special rate expenditure" on capital assets. This phrase effectively covers any assets with a life expectancy of 25 years, or any plant and machinery incorporated into a commercial building or similar structure.
That is not to say that in situations where immediate 100% tax relief no relief is available, generally there will now be 50% immediate tax relief followed by a tapered deduction over time for the residual unrelieved element of the initial cost. Certain other types of similar relief that already exist in the UK tax code will also generally be retained for separate use (for example, the similar but separate system of structures and buildings allowances introduced in 2018 for the core "bricks and mortar" elements of commercial construction projects that are not usually eligible for the particular type of tax relief outlined above).
In keeping with the theme that the government is looking to supporting the UK's SMEs the small business multiplier (i.e., the number of pence in the pound representing the percentage of a commercial property's rateable value to be charged as business rates in appropriate cases) will be frozen for the fourth consecutive year, at 49.9, whilst the main "multiplier" will increase in line with inflation from 51.2 to 54.6. In conjunction with this, the existing but temporary 75% rates relief for eligible retail, hospitality and leisure properties is now being extended to cover the financial year 2024-25 as well.
R&D Tax Reliefs
Many were hoping that the Autumn Statement would address the highly topical area of R&D tax reliefs, given that on 18 July 2023 the government had already published draft legislation for a new simplified merged system. Expectations were largely met, as the Chancellor officially announced the arrival from April 2024 onwards of a new simplified system merging together the R&D Expenditure Credit System ('RDEC') and R&D SME schemes. Although we are yet to see how this will be definitively reflected in the Autumn Finance Bill 2023, the government has already published a technical note outlining the main features of this new simplified merged system, which we briefly summarise here:
- Loss Makers - the notional rate of tax which loss makers need to apply to their RDEC credit has decreased from 25% to 19%. This means that loss makers will now be able to carry forward (or surrender intra-group) a larger portion of their RDEC credits than they previously could.
- Outsourced R&D - subject to limited exceptions, from 1 April 2024 R&D claimants will not be able to nominate third party payees for credit payments and from 22 November 2023 no new assignment of R&D credits will be possible. Therefore, in an outsourcing scenario, it will be the decision-making company (as opposed to the company undertaking the work itself) which will need to file for the claim and receive payment. This is expected to reduce instances of double payment, as well as ensuring that payments can be made more rapidly.
- Subsidised R&D - continuing on an existing trend, companies will not be able to claim R&D where the cost for R&D work has effectively been subsidised using other similar funding. Interestingly, the technical note states that in the new simplified merged system this will be achieved by relying on the provisions regulating outsourced R&D rather than importing current subsidy restrictions.
- Intensive SMEs - unsurprisingly, the so called 'SME intensive scheme' announced at Spring Budget 2023 (which provides special relief to the most R&D intensive SMEs) is to go ahead. However, the intensity threshold has been lowered from 40% to 30%, and a one-year grace period will be introduced for SMEs who might dip under the 30% threshold after initially qualifying. It is important to note that, somewhat disappointingly, the 'SME intensive scheme' is not expected to be folded into the new simplified merged system but rather it is expected that it will sit alongside it in parallel. This could be seen as somewhat contradictory in the wider context of the R&D reform, as the Budget openly states that one of the purposes behind merging the previous systems is to ensure that companies do not have to navigate the (often complex) transition between two different regimes.
This announcement marks the end of a policy and legislative journey which began with the 2021 Budget, when the government opened a consultation on the efficiency of the R&D tax reliefs landscape in the UK. However, despite the consultation having now been closed and the introduction of the new simplified merged system, the Budget does note that further action may be needed to "reduce the unacceptably high levels of non-compliance in the R&D reliefs", meaning that we could see further legislation being introduced in the near future for these purposes.
Today's general lack of intrigue on the personal tax side did not prevent the Chancellor throwing out a few of the now traditional crowd pleasers about the cost of pints (coincidentally giving him the chance to praise a few of his colleagues in important marginal seats), confirming that the rates of alcohol duty would remain frozen until August 2024. Pubs, cafés and other retail, hospitality and leisure business will continue to benefit from up to 75% relief on their business rates.
Of course, an Autumn Statement would not be complete without a 'Tackling the Tax Gap' section, in which this year it is promised that the measure of packages designed to ensure that everyone pays their fair share will be the largest since 2016, raising £5 billion of revenue over the next five years. Given repeated government promises to shake lost revenue out of tax evaders, we remain more pessimistic than the Chancellor about the prospects of success of this policy.
Finally, the future of the tax that dare not speak it speak its name, at least for the Tories, the remittance basis remains untouched. Time is running out for the Conservatives to tackle one of the key planks of Labour's tax policies by introducing their own reforms. Please look out for our upcoming research paper on options for the future of the remittance basis.
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