Autumn Statement 2022 - Corporate Taxes

Corporate Tax Measures announced in the 2022 Autumn Statement:

Global Minimum Corporate Tax Rate

The government confirmed its intention to implement the Pillar Two rules issued in draft on 20 July 2022 (see previous coverage here) in order to comply with the global minimum corporate tax rate of 15% proposed by the OECD.

The new rules will apply for accounting periods beginning on or after 31 December 2023. The implementation of the Pillar Two rules is intended to protect the UK tax base against aggressive tax planning and reinforce the competitiveness of the UK. The measure is anticipated to raise £2.3 billion a year by 2027- 2028.

 

R&D Tax Reliefs

Responding to concern about significant abuse of the SME R&D regime and in order to increase the international competitiveness of UK businesses, the government is rebalancing the rate of R&D relief for SME and Large Companies (under the R&D Expenditure Credit Regime), as follows:

For expenditure on or after 1 April 2023:

• Research and Development Expenditure Credit (RDEC) rate will increase from 13% to 20%
• Small and Medium-sized Enterprises (SME) additional deduction will decrease from 130% to 86%
• SME credit rate will decrease from 14.5% to 10%.

The government will also consult on the design of a single R&D tax relief scheme and mechanisms to further support R&D intensive SMEs without increasing overall the £20bn allocated to supporting R&D in the UK.

In addition, as previously announced at Autumn Budget 2021, the R&D tax reliefs will be reformed by expanding qualifying expenditure to include data and cloud costs, refocusing support towards innovation in the UK, targeting abuse and improving compliance.

The measures announced follow from the introduction of the SME PAYE and NIC cap and prohibition of overseas R&D costs. While the changes will be welcomed by large companies, they represent yet another blow to SMEs undertaking genuine R&D for whom R&D tax credits represent a valuable source of funding.

Bank Corporation Tax Surcharge

Following the decision to proceed with the Corporation Tax rate increase to 25% from April 2023, the changes to the Bank Corporation Tax Surcharge which are legislated to take effect from the same point will also go ahead. From April 2023, banks will therefore be charged an additional 3% rate on their profits above £100 million, which means they will continue to pay a higher combined rate of corporation tax than most other companies, and a higher rate than they did previously.

Windfall Taxes on energy profits

There are a number of changes to the Energy Profit Levy including the introduction of the Electricity Generator Levy. 

The 25% windfall tax on energy companies was increased to 35%, though it remains a temporary measure.

To ensure that electricity generators also pay “their fair share towards strengthening public finances” a temporary, 45% levy on corporate electricity generators will be introduced from 1 January 2023. The levy will be extraordinary profits, defined as electricity sold at above £75MWh. The measure will run until 31 March 2028.

Combined with corporation tax, this brings the cumulative rate on earnings over £75Mwh to 70%.

Key points:

• The levy will be limited, through the de minimis threshold, to those corporate groups generating more than 100 Gigawatt-hours (GWh) per annum from in-scope generation assets in a qualifying period. In calculating the levy, a deduction will be available in the form of an allowance set at £10m per annum for a corporate group.  The calculation will be undertaken at an aggregate level across all in-scope generation of the group.
• The tax will not apply to electricity generated under a Contract for Difference entered into with the Low Carbon Contracts Company Ltd (LCCC). 
• The revenue measure will not include revenue that renewables generators earn from the sale of Renewables Obligation Certificates or revenue from capacity market payments.
• The levy will not be applied to pumped storage hydroelectricity or battery storage.

There will be a consultation period with relevant generators before draft legislation is published in mid-December.

Audio-visual tax reliefs

The Government is consulting on its proposed reforms to audio-visual tax reliefs which represent five of the eight Creative Industry Tax Relief schemes currently in place. The government’s goal is “to ensure that they remain world-leading and continue to best serve the needs of creative companies”.

Key proposals under consultation include:

• Merging the current film and TV reliefs into a single tax credit scheme
• Transforming all schemes into above the line, refundable expenditure credits
• Increasing the minimum expenditure threshold and clarifying the definition of “slot length” in the High-End Television Tax Relief scheme
• Introducing a UK expenditure requirement to replace the current European expenditure requirement and varying the subcontracting limit in the Video Games Tax Relief scheme.

The consultation will close on 9 February 2023.

Transfer Pricing

From 1 April 2023, large multinational entities operating in the UK will be required to maintain a Master File and a Local File in a prescribed standardised format set out in the OECD Transfer Pricing Guidelines.

In the meantime, HMRC will continue to consider the merits of the introduction of a Summary Audit Trail requirement. A Summary Audit Trail would consist of a questionnaire covering the main steps undertaken in preparation of the Local File. It would constitute an additional compliance burden for businesses, on top of preparing and retaining a Master File and a Local File.

Diverted Tax Profits

From April 2023, the rate of Diverted Profits Tax will increase from 25% to 31%, in order to retain a 6% differential above the main rate of Corporation Tax, and therefore ensure that it remains an effective deterrent against diverting profits out of the UK.

If you have any questions, please contact Claire McGuigan, Karen Doherty or Lorraine Nelson.

With thanks to our colleagues in BDO UK.