SECTOR COMMENTARY

Autumn Budget 2021 - Sector Commentary


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Following the Autumn Budget announcement, we analyse how certain sectors will be affected.

 

Financial Services Tax

David Britton, Tax Partner, Banking, Nicoletta Papademetris, Tax Partner, Head of Financial Services and Thomas To, Tax Partner, Insurance

Despite a number of key measures being announced prior to Budget day, such as the rise in Corporation Tax to 25%, there were some interesting announcements made yesterday which we have analysed in this article. These include a reduction to the Banking surcharge from 8% to 3%, a brief announcement regarding the next steps relating to tax on IFRS 17, the release of a policy paper on QAHCs and a number of changes proposed to R&D tax reliefs. 

Please reach out to your FS tax contact to discuss any of these changes and the impact on your business.

Banking surcharge

The corporation tax rate rise announced in the March Budget combined with the surcharge would have meant banks pay a combined corporation tax of 33% on profits over £25m. As anticipated, the Chancellor announced a cut in the rate of the UK bank corporation tax surcharge from 8% to 3%. In addition, the surcharge allowance, the taxable profits above which banks pay the surcharge, will increase from £25m to £100m.

This announcement means that the combined corporation tax rate for banks above the new surcharge allowance of £100m will rise by 1% to 28%. The changes will have effect for the accounting periods beginning on or after 1 April 2023.

The reduction in the surcharge rate together with the increase in surcharge allowance is especially welcomed. The changes will help ensure that the UK banking sector remains competitive at least from a tax perspective.

We expect the surcharge rate change to be substantively enacted over the coming months. For balance sheets prepared to a date before the substantive enactment of the new surcharge rate there is no deferred tax re-measurement and previous rates enacted must be applied. Any material effect of the decrease to 3% percent must be disclosed.

US-parented companies and groups should be aware that under US GAAP the position is slightly different. Under US GAAP there are no requirements to disclose tax rate changes that have been proposed or announced, but not enacted. Changes in tax rates are accounted for only once enacted, in this case once Royal Assent has been given.

Insurance

Insurance Premium Tax – identifying where the risk is situated

The Government has announced that legislation will be included in Finance Bill 2021 – 22 in relation to the location of risk for Insurance Premium Tax purposes. The intention of the legislation will be to ensure that risks located outside the UK continue to remain exempt from UK IPT.

The measure is not expected to substantively amend the location of risk criteria. Reliance was previously placed on directly effective EU legislation but will now be included in UK primary legislation and will apply from the date of Royal Assent of Finance Bill 2021 - 22. 

IFRS 17

The commencement date for IFRS 17 is 1 January 2023. The Government confirmed that they will introduce powers in Finance Bill 2021 – 2022 to lay regulations for insurance companies to allow the spreading of the transitional adjustment for IFRS 17 for tax purposes.

There was also reference made to revoking the requirement for life assurance companies to spread the relief for acquisition expenses. We understand that the government will consult on the design of the rules before implementation. As yet, we do not know the likely timeframe for the spreading period of the transitional adjustment and insurance groups will be very interested in this with implications for deferred tax in accounts along with the cash tax implications. The reference to revoking the rules on the spreading of relief for acquisition expenses for life assurance companies is intriguing. We await the consultation to understand the detail of any rule changes in this area.

Asset Management

Update on new regime for Qualifying Asset Holding Companies (QAHCs)

The Government has published a ‘policy paper’. However, this paper does not contain any significant new information beyond the previous consultation documents and the draft legislation for part of the regime published in July 2021. The new regime for QAHCs is due to come into effect from 1 April 2022. The policy paper’s main points are:

  • re-stating the background to the QAHC regime and UK funds review
  • confirming the 1 April 2022 timing for the beginning of the regime
  • confirming the key entry criteria for a QAHC as (i) 70% ownership by diversely-owned funds or certain institutional investors, and (ii) carrying on mainly an investment activity
  • giving confirmation of some of the areas to be included in the final regime, including: 
    • exempting certain gains of QAHCs
    • amendments to interest relief and withholding tax rules for QAHCs
    • treating premiums paid on the repurchase of shares by QAHCs from individuals as capital (rather than income)
    • exempting the repurchase of share and loan capital by QAHCs from stamp duty.

We await the remainder of the draft legislation to confirm whether the regime will operate as intended. This is expected on 4 November.

Update on UK funds regime review 

The Government continues to review the UK’s funds regime. In addition to the QAHCs and REITs reforms, the FCA has now published its rules for the new Long-Term Asset fund. The Government will also publish its response to the call for input on the broader elements of the UK funds regime review, as well as a consultation on options to simplify the VAT treatment of fund management fees, in the coming months. 

Other Financial Services specific announcements

Taxation of securitisations and insurance-linked securities

The Government will add legislation in Finance Bill 2021 – 22 to allow changes by secondary legislation to be made on Stamp Duty and Stamp Duty Reserve Tax relating to securitisations and insurance-linked securities. We await any further information from the Government regarding their intentions in introducing this additional power.

Economic Crime (Anti-Money Laundering Levy)

The Government will establish an Economic Crime (Anti-Money Laundering) Levy (‘the levy’) on entities that are regulated for anti-money laundering (AML) purposes which includes financial institutions.

The levy will first be charged on entities that are regulated during the financial year from 1 April 2022 to 31 March 2023. The amount payable will be a fixed fee fee based on the size band an AML-regulated entity falls into based on their UK revenue. Amounts will be payable following the end of each financial year so the first payments will be made in the financial year from 1 April 2023 to 31 March 2024.

No specific amounts have been included in the published draft legislation but will be based on the bands below.

  • small (under £10.2m UK revenue)
  • medium (£10.2m – £36m)
  • large (£36m - £1bn)
  • very large (over £1bn)

You can also read further detail on our Budget Hub relating to the pension, employment and corporate tax issues announced.

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Leisure & Hospitality

Jonathan Hickman, Partner and Head of Leisure and Hospitality

The hospitality and leisure sector has suffered a brutal ordeal over the last 18 months. As a result of social contact restrictions, the inflationary force of the pandemic, and Brexit teething issues, businesses have been left short-staffed, with broken supply chains and rising costs. 

For this reason, industry hearts were in mouths for the unveiling of the Government’s reformed Budget yesterday. So what have we learnt, and how will these changes impact the hotels and restaurants we know and love?   

The government has extended its business rates relief in response to the pandemic: eligible firms will now be entitled to a 50% discount for a full year from April. While this discount could help smaller, independent businesses, the low cap of £110,000 means it will be far less helpful for larger corporations and chains. 

Businesses will feel the effects of the rise in National Insurance, inflation, and minimum wage rates, including apprenticeships. That said, the rise in minimum salary and apprentice pay could entice more young people to join the hospitality industry. In addition, with the £1.6bn cash injection into T-levels, there is scope for these skills-based courses to include catering and hospitality, further encouraging home-grown talent to fill labour shortages.

The industry will benefit from a freeze in alcohol duty, which had been due to rise by 4.9% next year. Moreover, the drastic changes to alcohol duty regulations announced for February 2023 will be an appreciated reform for most businesses. Restaurants will profit from lower rates on weaker alcohols such as wine, beer, and cider, and the halting of the duty premium of 28% on sparkling wine. Equally, pubs will welcome the slashing of duty on draught beer and cider.   

Finally, reforms to business rates revaluations include investment relief for firms who adopt green technologies, and business rates improvement relief. While the industry has made large strides in recognising the importance of Environmental, Social, and Governance during the pandemic, there is still more to be done, and this reform could motivate hospitality firms to make sustainable changes – particularly to older properties. 

Although the industry has been asking to retain the 12.5% VAT rate beyond April next year - when it is due to rise to 20% VAT - there was no mention of this in yesterday’s Budget. A VAT freeze would maintain operator costs, preventing further  rises in prices for disgruntled consumers, and boosting recovery. Let’s see if industry pressure will pay off in the coming months. 

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Life Sciences

Carole Le Page – Tax Partner, Life Sciences

In the Budget, the Chancellor announced various investment to support innovation and growth which will be of interest to the life sciences sector.

Whilst it was acknowledged that the UK starts from a strong position, gross expenditure on R&D in the UK in 2019 was 1.8% of GDP, which is lower than other advanced economies and below the OECD average of 2.5%.  The government is targeting this to be 2.4% of GDP by 2027, driven by the ambition to increase R&D spending to £22bn by 2026/27 and cement the UK as a global science and technology superpower.

To move towards the 2026/27 ambition, spending on R&D is planned to hit £20bn by 2024/25 and life sciences businesses will benefit from some of this funding.  For example, a new £1.4bn Global Britain Investment Fund was announced, which includes £354m for life sciences manufacturing, including medicines, diagnostics and vaccines, and there is £5bn provided over the spending review period for health related R&D.

£1.1bn more than currently is also to be invested in universities and research institutions by 2024/25.  Given the number of businesses in the life sciences sector that start by being spun out from universities, over the longer term this could prove to be a real boost to the sector.

As is the case for many, access to talent is an increasing challenge for the sector.  The Chancellor announced a new Global Talent Network to proactively find and bring talent to the UK in key science and technology sectors, which could help here.

The key tax announcement relevant to the sector relates to proposed changes to the R&D tax credits regime from April 2023.  In particular, at the moment, it is possible to claim credit in relation to certain spend incurred overseas, but a restriction or possible prohibition in relation to the inclusion of overseas costs was announced.  More details are expected soon, but, depending on how this is implemented, this could have a significant impact on life sciences businesses given they often need to undertake key aspects of their R&D overseas, for example in relation to clinical trials and to get licencing approvals.   

The life sciences sector has remained resilient through Covid 19, and is seeing a good level of M&A activity. Owners will no doubt be relieved that the speculated increases to capital gains tax didn’t arise, although it is possible that rate increases could be announced in future.

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Manufacturing

Simon Bird, Director - Corporate International Tax & Manufacturing sector Tax Lead, James Hewitt - Assistant Tax Manager

Autumn Budget and Spending Review 2021 – A missed opportunity for the manufacturing sector?

Whilst the Chancellor’s statement today provided a number of headline grabbing announcements, particularly around a stronger economy and growth figures, what was lacking for manufacturers was a clear, balanced and targeted policy designed to support the sector for the long-term.

By contrast, the food and drink subsector received a much needed boost with the promise of a significant overhaul of alcohol duty and a new temporary business rates relief of 50% for the retail, hospitality, and leisure sector in England. So it was a shame the Chancellor did not look to apply this across the board and support the manufacturing sector as a whole.

Nevertheless, it was not all doom and gloom for UK manufacturing.

Earlier this year, in our Manufacturing Tax Manifesto we outlined our thoughts on the importance of establishing a clear, targeted and long-term policy for the sector and identified specific policies to help stimulate investment and growth, and it appears the Chancellor has taken some of these policies on board.

Business Rates

While many businesses have long been calling for a reform of the UK business rates regime, there were some limited changes announced that will help in the interim.

The freeze to the business rates multiplier for a second year will be welcome news to manufacturers as will the announcement of the business rate exemptions for property improvements from 2023.

In addition, from 2023, the government will introduce business rates exemptions for investments in onsite renewable energy generation and storage, and a new 100% relief for eligible heat networks. This is something we called for in our Manifesto and it is encouraging that the Government is making this investment to help businesses decarbonise their buildings and factories.

Capital Allowances

Manufacturers plan their investments for the long term, and so it was encouraging to see the Government announce that the £1m limit for the Annual Investment Allowance will be extended to March 2023.

We called for this extension be made further into the future in our Manifesto, at least until the end of the current parliament, but this will still be welcome news to manufacturers for the next 17 months alongside the new ‘super-deduction’ regime announced in March 2021.

Research and development

A number of announcements on R&D will also be of interest to manufacturers, given that the sector accounts for 65% of UK R&D. It was therefore disappointing that the Chancellor has missed his commitment to spend £22bn on R&D by 2024, pushing the funding period back by 2 years until 2026.

A number of changes to the R&D tax incentives regime were also announced, both to expand the scope of qualifying expenditure to include data and cloud computing, but also an intention to narrow the scope to only R&D physically conducted in the UK. With further changes to the R&D regime expected in the future, following the recent consultation, it remains to be seen whether manufacturers will be net winners or losers from these changes.

Overall, the Autumn Budget and Spending Review appears to be a missed opportunity for the Government to support the manufacturing sector. It was notable by their absence any significant announcements to support manufacturers on improving skills, productivity and the digital and green agenda.

We therefore hope that as the economy continues to recover from the COVID-19 pandemic, the Government will continue to focus on the long-term, and work towards providing a clear, balanced and targeted tax policy to support the sector along the lines of what we set out in a Manifesto in March.

For more details on the tax policies and announcements from the Autumn Budget and Spending Review please click here.

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Professional services

Frances Edwards, Tax Director, Professional Services

A quiet Budget following a period of turbulence for Professional Service firms

It has been a turbulent few months for Professional Service firms with the uncertainty of firms’ future cashflows following the proposed changes to basis period reform, subsequent cost increases of the health and social care levy, and the increase in corporation tax to 25% in April 2023. The lack of changes being served up by the Budget will come as a welcome relief.

Having said that, no doubt the extension of the £1m annual investment allowance until March 2023 will benefit firms – many Professional Service firms have been investing in their IT or office set up following the pandemic and relief for longer term investment plans is encouraging.  

The Budget did bring some additional details relating to basis period reform, including the expected impact to the exchequer and confirming the already announced implementation date in the 2023/24 tax year: a welcome deferral of a year. It is expected that a number of changes to the draft proposals including more flexibility on how overlap can be utilised be included in further details due to be published in early November.

It’s still important for firms to consider the cash flow impact of basis period reform as it has only been delayed by a year. While this reform will look at the amounts taxable in the year, it is also likely that we will see the timely tax payments consultation bring tax payments forward giving a double hit to cash flows so planning and understanding the impact on the capital in the business will be key.

At a macro level, there were some positive messages around the economy as a whole including investment and growth. However, the expected inflation and wage rises will also be of note to Professional Service firms who no doubt will already be managing a hardening employment market with a war for talent and what’s been described as the ‘great resignation’ of those experienced professionals looking at alternative careers. Managing the people costs for people businesses will remain at the top of all professional services firms’ agenda’s.

The debate around optimal operating structures, partnerships v corporate v hybrid structures continues and changes. Basis period reform may be seen as diminishing the value of an LLP while, conversely, the combination of increased corporate tax rates to 25% and the higher dividend tax rates keeps extraction of profits from a corporate looking costly – and then there is the impact of the increase National Insurance costs to consider. This creates a complicated model that is ever changing.

Finally, whilst it’s our role in life to constantly evaluate the financial impact of changes, it remains clear that the culture of a firm is still arguably the most important factor when considering business growth and success. The much touted phrase, ‘culture eats strategy for breakfast’ applies here, so when considering the impact of these changes, we need to listen to our people and ensure changes best drive our businesses forward.

Ensuring you focus on people to drive engagement and also have an operational structure that is fit for the future will enable strong Professional Service firms to succeed. Read more on the Budget technical changes.

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Real Estate

Terry Moore, Tax Partner, Real estate

A number of measures have been announced relating to real estate. The key headlines for the sector centre firstly around the introduction of residential property developer tax at a rate of 4% on corporate profits from residential property development activity from April 2022 and secondly on a reform of business rates from 2023 which will move to a three yearly revaluation cycle.

Residential property developer tax (RPDT)

Following a consultation on the introduction of RPDT, the Government has published its response to the consultation and has announced that it will be introduced at a rate of 4% on corporate profits from residential property development activity from April 2022.

Residential property development activity is broadly defined but will require an interest in the land being developed. The development of residential property to be held as an investment asset for letting is currently excluded..

Development by charities and subsidiaries of charities will also be excluded which should mean that most types of social housing development will not be subject to RPDT. Development of some communal dwellings such as care homes and purpose built student accommodation will also be excluded.

As RPDT will only apply to companies, it will be administered as part of the corporation tax system with the same filing and payment dates but will, to some extent, operate as a separate tax calculated as part of the annual corporation tax return. Profits for RPDT will be as calculated for corporation tax purposes but with the exception that interest will not be deductible. A separate calculation will, therefore, be required of the level of profits chargeable to RPDT. This calculation will need to determine a just and reasonable apportionment of profits where amounts are derived from activities other than chargeable residential property development to identify those profits within the scope of RPDT.

Special rules modelled on the rules for corporation tax will apply to losses with relief being limited to losses arising for RPDT purposes from April 2022.

Each group will have an allowance of £25m of profits which will not be subject to the charge. However, where a group participates in a joint venture, special rules will apply to reduce the level of allowance available to the group to reflect its share of amounts not taxed within the joint venture vehicle.

REITs

Further to announcements made in the summer, the Government has confirmed that it will proceed with a number of simplifications to the REIT regime.

The listing requirement will be removed for cases where institutional investors hold at least 70% of the REIT. This could make REITs more attractive to institutional investors as it would remove the significant cost of maintaining a listed entity.

Tax charges in respect of distributions to shareholders with holdings of 10% or more will be disapplied where they would be entitled to payment of gross distributions, such as UK resident corporates and registered pension funds. Certain non-rental profits arising from complying with planning obligations will be disregarded for the purposes of the balance of business tests and there will be some administrative filing simplifications where group accounts show a prima facie case of the ‘balance of business’ tests being met at a level of at least 80% of income and assets.

Asset holding companies

Following several consultations, the Government has announced that it will proceed with the introduction of an asset holding company regime which is intended to benefit (and attract to the UK) investment entities such as diversified investment funds, charities, long-term insurance business, sovereign immune entities and certain pension schemes and public bodies. Qualifying entities would be able to elect into the regime.

Although, UK land would not be a qualifying asset, an entity which has elected into the regime should secure a number of tax benefits including:

  • Exemption from UK tax on disposals of overseas property;
  • Exemption from UK tax on profits of an overseas property rental business where those profits are taxed in the overseas jurisdiction;
  • Exemption from applying withholding tax on the payment of interest;
  • A tax deduction for certain interest payments that might usually be treated as a distribution and
  • A tax deduction for certain interest payments on an accruals basis that might ordinarily only be deductible when paid.

Business rates - Covid 19

The Government recognises that many businesses are still recovering from the impact of Covid 19 and, therefore, the multipliers used for the calculation of business rates liabilities will remain frozen until 31 March 2023.

Businesses operating in the retail, hospitality and leisure sectors and which are not already fully exempt from business rates (through small business rates relief) will benefit from a 50% relief from business rates for the year to 31 March 2023 - up to a maximum value of £110,000 per business.

Where a business in England is subject to increased business rates liabilities due to a revaluation, a transitional relief is available to mitigate the impact. This is not available to businesses elsewhere in the UK. As the next revaluation has been delayed to 2023, transitional relief will be extended to the year to 31 March 2023. This will limit bill increases to 15% for properties with a rateable value up to £20,000 and to 25% for properties with a rateable value up to £100,000. The Government will consult on the continuation of transitional relief from 2023 in the light of the reform of business rates to be introduced alongside the 2023 revaluation.

Business rates - reform

The Government has published the outcome of a consultation into a potential reform of business rates. It has been decided not to proceed with many of the ideas under consideration. However, business rates will move to a system of three- yearly revaluations. This will initially be implemented in 2023 with a revaluation of properties to reflect their values in 2021 (the first revaluation for business rates since 2015).

The intention of the new revaluation cycle is that valuations for business rates purposes will more accurately reflect changes in property values. Additional funding will be provided by Government to the Valuation Office to provide resources to facilitate undertaking the revaluations. However, the work of the Valuation Office will be supported by new filing obligations on ratepayers to be requiring notification to the Valuation Office of changes to the occupier, changes to the physical characteristics of properties and information on rent and leases. These obligations will be phased in from 2023.

From the 2026 valuation, the appeals process for revaluations will also be simplified. The current regime involves a ‘check’, ‘challenge’ and ‘appeal’ approach. The ‘check’ element will be abolished and a three month time limit will be introduced for ‘challenges’. The Valuation Office will then be subject to a statutory obligation to resolve challenges before the next valuation takes effect.

The Government acknowledges that a potential increase in liabilities for business rates might discourage property improvement which would impact the valuation of the property such as adding rooms to a hotel or expanding a factory. It is, therefore, proposed to implement an improvement relief providing 100% relief from higher business rates bills for 12 months following eligible improvements. The detail of the proposed relief will be subject to consultation before being introduced from 2023.

To support green investment and decarbonisation, a relief will also be introduced to exempt plant and machinery used for onsite generation and storage of renewable energy such as solar panels and electric vehicle charging points.

Capital allowances

The annual investment allowance threshold of £1m will be extended to 31 March 2023.

Capital gains tax on residential property

Individuals and trusts selling residential property are currently required to file a return and pay any capital gains tax on disposal within 30 days. From 27 October 2021, this time limit is to be extended to 60 days to allow more time to produce accurate figures and to allow taxpayers to consult with professional advisers.

ATED

The annual charges to the ATED will be increased by 3.1% from 1 April 2022 in line with the September 2021 Consumer Price Index.

Corporate re-domiciliation

The Government has published a consultation document to consider whether UK corporate law should be amended to allow companies incorporated elsewhere in the world to re-domicile to the UK. If this were to be introduced, it may be attractive where, for example, an acquisition is made of a non-resident corporate entity owning UK property and where it is not desirable for the acquired company to be retained as an offshore entity.

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Retail

Neil Stockham, Corporate Tax Partner, Retail & Consumer Markets

The retail sector has suffered many tough challenges over the last 18 months. Now that the sector has reopened and the ‘golden quarter’ has begun, there are further challenges for retailers to navigate including rising inflation, ongoing tension in post-Brexit trading models, widespread staff shortages and pressures on supply chains from rising transport costs and lead times. Many retailers were therefore hoping for some good news from the Chancellor. While there was certainly some welcome short-term help and support, I think most business will be left pretty disappointed.

Business Rates

The headline announcement for retailers was that they (along with their peers in the Leisure and Hospitality sectors) will be given a 50% discount on business rates for 2022/23, up to a maximum of £110,000, as part of the government’s Fundamental Review of Business Rates.

The Chancellor also announced:

  • The government will make the business rates system fairer and timelier, with more frequent revaluations every three years, compared with the current system of five. The new revaluation cycle will come into effect from 2023.
  • The planned increase in the multiplier will also be cancelled.
    Business rates are currently calculated by multiplying a property's rateable value (RV) by the relevant multiplier (or uniform business rate, UBR) and applying any relevant reliefs. The business rates multiplier is currently 49.9p per £1 of RV for and properties with RVs below £51,000 and 51.2p per £1 of RV for properties with an RV above £51,000.
  • Further reforms to business rates revaluations including investment relief for businesses that adopt green technologies, and business rates improvement relief.

Retailers will generally welcome the news of the government’s further support for the sector following the trauma of the past 18 months and they should hopefully encourage investment in new store openings and bolster confidence in what is a challenging environment.

However, capping the 50% high street discount at £110,000, the benefit will mean little to city centre businesses, particularly those in London’s West End, where it will result in no more than a 1% cut to annual business rates’ bills. The proposals result in an overall cut of around 4% (c£1bn) on the annual £25bn business rates bill in England and, whilst both this and the more frequent valuations are welcome the announcements, they fall far short of the long-promised fundamental review.

While retailers have made large strides in recognising the importance of Environmental, Social, and Governance during the pandemic, there is still more to be done. The green incentives announced could motivate retailers to make sustainable changes – particularly to older properties. 

Employment costs

The chancellor confirmed the UK’s National Living Wage, which applies to all workers aged over 23, is to go up to £9.50/hour from April 2022. For those aged 21 to 22, the minimum will increase from £8.36 to £9.18. This represents a welcome pay rise for millions of low-paid workers. However, the rise will be yet another increase in cost base (NIC costs are also set to rise in April 2022) that needs to be covered in a tough trading environment and it remains to be seen whether this will be enough to encourage further home-grown talent to fill labour shortages.

Online sales tax

The government will shortly publish a consultation on a UK-wide online sales tax (OST), the revenue from which should be used to reduce business rates for retailers with properties. We await further details here, but the key to making this work practically will be to ensure that the cost is not simply passed straight onto consumers.

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Shipping

Philip Parr, International Tax Partner

Autumn Budget proposes reform of UK tonnage tax

Commenting on the UK’s Autumn Budget delivered on 27 October, Philip Parr, an international tax partner at BDO said:

“The Budget included the first substantive reforms to UK tonnage tax since it was introduced in 2000. Following the UK’s departure from the EU, the Chancellor’s aim is to create a more flexible and attractive system for overseas shipping groups to relocate to the UK and to maintain the UK’s status as a leading country in the maritime industry.

The main changes announced were:

The complex EU flagging rules, which came into force in 2005 and required a certain percentage of vessels to be flagged in the EU, will be abolished. Instead the UK flag will be a more important factor in determining whether a company satisfies the strategic and commercial management requirement test. 

The current 10 year exclusion on re-joining the tonnage tax regime will be reduced to 8 years, with greater discretion to admit companies who missed an election window, if there are good reasons. At the moment this appears to stop short of opening a new election window into tonnage tax that would allow previously qualifying companies to re-elect into tonnage tax. HMRC’s guidance on what they will accept as good reasons will be key.

HMRC provides detailed guidance on vessels that can qualify for tonnage tax. The guidance on qualifying vessels will take account of developments in technology, to allow additional types of vessels to potentially qualify for tonnage tax. There will also be greater importance placed on investment in decarbonisation and pollution control when considering the qualifying status of vessels eligible for tonnage tax which is obviously intended to support the Government’s net zero plans.

The permitted ancillary passenger related income limit has been raised from 10% to 15%. This should improve not only administration but also vessels carrying passengers should benefit from the increased limits, in respect of income such as gambling and on board sales.

The government have also indicated that they are considering whether ship management could be included within the scope of tonnage tax, and how they can make use of existing powers regarding the training commitment. 

Overall the above changes should make the tonnage tax regime more attractive without any cost to the Treasury. 

Other areas of relevance to the sector included the government’s commitment of funds to assist the shipping and maritime sector to decarbonise. On Freeports, the government announced up to £200 million of support to help deliver the eight Freeports in England.

The UK continues to offer excellent infrastructural support for shipping businesses. The measures announced are welcome as they enhance the existing operating environment for the industry in the UK and also evidence the government’s commitment to the long-term future of the industry.”

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Technology and media

Vinesh Bharadwa, Partner, Technology & Media

The Autumn Budget was relatively low key for the Technology and Media sector compared to this year’s Spring Budget. However, the Chancellor reiterated his desire to invest in growth through increasing innovation in the UK and there were some key announcements that will have an impact on the sector in general, like the changes to the R&D tax relief rules, as well as particular focus on certain sub-sectors, like healthtech and cyber security.

The extension of qualifying R&D expenditure to include data and cloud computing costs from April 2023 is welcomed and will enable software-related claimants of R&D relief to increase their R&D claims, though this has been a somewhat belated response to an extension of the rules that the sector has been clamouring for in order to modernise the legislation for some time. The Government’s proposed attempt to focus R&D in the UK by prohibiting certain overseas costs from qualifying expenditure could, however, have a detrimental impact, particularly for UK-headquartered multinational groups that have non-UK development centres, but where the costs are borne in the UK. Many SME businesses in the sector also use non-UK talent for R&D purposes and it is hoped that these restrictions do not have a damaging impact on the ability of these companies to maximise their R&D claims. The consequences of these measures will be clarified once draft legislation in these areas is released.

The Government also announced measures to tackle the growing skills gap in the Technology sector by increasing spending on skills by £3.8 billion, a 42% increase, by 2024/25. This will include quadrupling the number of ‘skills boot camps’ offered in some key growth areas in the technology space, namely cyber security, AI, software development and agile programming and doubling Innovate UK’s funding to £1 billion. It is hoped that this investment combined with the ‘Scale-Up Visa’ system that is designed to enable highly-skilled individuals into the UK from overseas quickly, will promote and retain innovation and talent in the UK. How quickly this happens remains to be seen.

An indirect benefit to the sector is the announcement that the NHS will receive an additional £2.1 billion funding for improving IT and digital technology, which will be funded by the new Health and Social Care Levy. This will be welcomed news for technology businesses in the healthcare space and reflects the greater need for investment in the NHS’s IT and digital capabilities that have been highlighted following the increased uptake of data and digital resources as a result of the pandemic. Investment in AI and the digital transformation of the health service could enable significant efficiencies to be achieved and data to be harnessed in a powerful way.

There was speculation ahead of the Budget that further tax rises would impact the Technology and Media sector and the lack of any announcement regarding an increase in Capital Gains Tax rates will also be welcome news for entrepreneurial owner-managers of businesses in the sector.

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On-demand webinar: Autumn Budget 2021

Our tax experts Vanessa Lee, Caroline Harwood, Liam O'Doherty and Glyn Woodhouse, analyse the Chancellor’s announcement, and what this could mean for you or your business.

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