ICAS responds to Autumn Statement 2022
ICAS has responded to today’s Autumn Statement and is calling for action in key areas.
This includes action on simplifying Capital Gains Tax, visibility of spending and tax decisions, and a commitment to greater overall tax simplification.
On the key announcements in today’s Autumn Statement, ICAS experts said:
Corporation tax
ICAS welcomes confirmation of UK Corporation Tax rates in the Chancellor's Autumn Statement. Chancellor Jeremy Hunt has confirmed that the Corporation Tax rates announced in the March 2021 Budget (and briefly reversed in the September 2022 Mini Budget) will still apply, meaning that the main rate of Corporation Tax will increase to 25% from April 2023 for companies with taxable profits above £250,000.
ICAS believes that the government needs to ensure that the UK is a competitive and attractive place to be located, and invest in particularly post-Brexit. A key part of this should be a stable and consistent tax system, which allows both corporates and individuals to plan for the long term with certainty. Tax should certainly not be a disincentive – tax administrative systems must work and HMRC needs to provide an effective service to all businesses, large and small.
Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes) at ICAS said:
"Our Members tell us that companies seek certainty and stability in Corporation Tax rates and take account of those when making investment decisions. This has an impact on the strength of the overall UK economy. Companies will welcome the clarity that there will be no further changes in the 25% main rate of Corporation Tax. This will help plan their cash flows at a time of economic uncertainty.
The new Corporation Tax rates do of course bring a level of complexity, with the Corporation Tax rate for companies with taxable profits below £50,000 remaining at 19% (an effective marginal rate of 26.5% applying for taxable profits between £50,000 and £250,000). These limits are of course affected by the reintroduction of the associated companies rules from April 2023, so the £50,000 and £250,000 thresholds will be shared between companies under common control as opposed to only between companies in a 51% group."
Capital gains tax
ICAS is disappointed that the Annual Exempt Amount (AEA) for capital gains tax (CGT) will be significantly reduced from its current level of £12,300, firstly to £6,000 next year and then to £3,000 from April 2024, and that an opportunity to simplify CGT by introducing a single rate has been missed.
Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes) at ICAS said:
"Business owners throughout the UK will be monitoring the reduction in the AEA, which will impact the tax payable on the sale of their business. Increased CGT payable could have an impact on the attractiveness of the UK as a place to invest. ICAS supports opportunities for entrepreneurs to invest and, notwithstanding the lessons the Government needed to learn from the Mini Budget, additional barriers to investment could have a long-term impact on growth."
Susan Cattell, ICAS Head of Tax Technical Policy, said:
“The AEA is a straightforward, simple and comprehensible way of removing the need to report small capital gains. These significant reductions in the AEA will mean that many more taxpayers will have to engage with the complexities of the CGT regime – and HMRC will need to devote more resources to dealing with returns that produce very small amounts of tax.
“Multiple rates of CGT cause complexity and uncertainty. For example, there are practical problems with reporting and paying the tax on residential property gains within 60 days, where the reporting date falls before the end of the tax year, due to the link to the BR and HR income tax thresholds.
“Ideally, ICAS believes there should be a single rate of CGT – as was briefly the case in 2008/09 and 2009/10. The lower rates of CGT (linked to the basic rate income tax band) could have been regarded as unnecessary if the AEA had remained at a realistic level, similar to the income tax Personal Allowance. Having one fixed rate of CGT, set at an appropriate level, could also have limited the scope for manipulation through shifting income out of the year in which a gain is realised.
“An opportunity for simplifying CGT has been missed – and due to the significant reductions in the AEA, many more taxpayers will now have to engage with the CGT regime.”
Freezes to tax allowances and thresholds
ICAS is disappointed that one of the Chancellor's important revenue-raising decisions has been to impose an extended freeze in the levels of some key tax allowances and thresholds, rather than taking a more open and transparent approach.
Susan Cattell, Head of Tax Technical Policy at ICAS said:
“There should be more public discussion about the role of tax in supporting public services and contributing to the common good. The government could promote this by being open and transparent about the need to raise revenues and the role of tax in paying for public services.
“Instead, the Chancellor has decided to increase tax receipts in less obvious ways, through an extended freezing of some key allowances and thresholds, including the Personal Allowance, the higher rate threshold and the IHT threshold. This contrasts with the cancelled Health and Social Care Levy – where an increase in taxation was clearly linked to the need to raise more revenues to pay for social care. The Chancellor also reduced the threshold for paying the additional rate of income tax from £150,000 to £125,140.
“In recent years governments have been unwilling or unable to increase the main revenue-raising taxes but have still needed to raise money. The result has been opaque tax changes and a lack of transparency about revenue raising. ICAS believes that the Chancellor should have tried to improve the visibility of spending and tax decisions – and the link between them – rather than adopting a less obvious approach to raising additional tax revenues, through an extended freeze for some important allowances and thresholds."
Income tax rate bands
Justine Riccomini, Head of Tax (Employment & devolved taxes) at ICAS said: "The freeze in the UK Personal Allowance until 2028 will have a knock-on effect on Scottish taxpayers. It will bring more of those on low earnings, who may previously have been exempt, into income tax - assuming the income tax rates and bands which are set by the Scottish Government are maintained at current levels - and income from wages and taxable welfare payments rise. The Scottish Government has autonomy over income tax rates and bands and has diversified from the rest of the UK by introducing a five rates and bands system. The rates and bands in Wales remain the same as those of England and Northern Ireland currently.
Taxpayers in Scotland will need to await the Scottish Budget on 15 December 2022, when the rates for the 2023/24 tax year will be confirmed.”
45p tax rate band
Justine Riccomini, Head of Tax (Employment & devolved taxes) at ICAS said: “ICAS notes that the 45p additional rate band for Income Tax will apply at £125,140 from 6 April 2023, instead of the current level of £150,000. This will not apply to Scottish taxpayers in respect of earned income, but will apply to interest income as tax rates are set at a UK wide level.
It will be interesting to see whether The Scottish Government will decide to follow suit with the reduction in the additional rate band, as a 46% rate currently applies for Scottish taxpayers with earned income above £150,000.”
Making tax digital
ICAS is disappointed that the Chancellor did not use the opportunity in the Autumn Statement to delay the roll out of both Making Tax Digital for Income Tax Self-Assessment (MTD ITSA) and basis period reform.
Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes) at ICAS said:
"At a time when the smallest of businesses are coping with issues such as increased costs and supply chain issues, a further delay to MTD ITSA and basis period reform would have been welcomed. Our Members regularly give us feedback that they are concerned about the impact MTD ITSA will have on their clients and neither businesses nor HMRC would appear to be fully ready so that they can be compliant from April 2024.
Basis period reform will also affect those businesses who do not have a 31 March or 5 April year end as tax will move from a 'current year basis' (based on accounting year ends which land in a tax year) to a tax year basis. This will impact on tax payable in the 2023/24 tax year and, whilst it is possible to spread the effect of basis period reform over a period of up to five years, those businesses could see an increase in their tax bills at a time when the UK is facing a cost-of-living crisis."
National Living Wage
David Menzies, Director of Practice at ICAS said:
"The increase in National Living Wage to £10.42 will be welcomed by the lowest paid members of society at a time when day to day living costs are increasing substantially. This represents an approximate 10% increase on the current top rate.
For many businesses however, particularly in sectors such as hospitality and tourism or where profit margins are already small, the above inflation increase at the same time as general staff shortages, rising direct costs and supply chain issues, could make all the difference to the business ongoing viability. Business owners should be taking steps to forecast through the impact of all such factors and take professional advice at an early stage."
Freezing of the Employer's NICs threshold
Justine Riccomini, Head of Tax (Employment & devolved taxes) at ICAS said: “The cost of employment for employers who have an employer NICs bill of more than £5,000 per annum will be likely to rise as salaries and wages increase between now and April 2028 and the employer's NICs threshold is frozen at the current rate of £9,100pa.
“The Employment Allowance was increased to £5,000 from the previous £4,000 per annum in April 2022 but it is also being retained at the current figure. However, the Employment Allowance only helps the smallest employers as only those with employer's Class 1 NICs liabilities of less than £100,000 per annum are eligible for the reduction.”
VAT
ICAS notes with concern the announcement that the VAT registration threshold will remain at £85,000 until April 2026. This will extend the obligations of being VAT registered on more small businesses, who will need to register for VAT and submit VAT returns using software compliant with Making Tax Digital.
Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes) at ICAS said:
"The VAT registration threshold has been at its current level since April 2017 and, as such, this means that more small businesses in the UK are required to register for VAT. Our Members are telling us about the challenges with HMRC's new VAT Registration Service, but being VAT registered also creates an additional admin burden on small businesses. By having to charge VAT, those businesses will have to pass on an additional 20% cost to their customers at a time when the UK is facing a cost-of-living crisis. Those same small businesses will have to comply with the requirements of Making Tax Digital for VAT, something which would have been avoided if they the VAT registration had been increased."
Office of Tax Simplification
ICAS is disappointed that the Chancellor appears to have decided not to reverse his predecessor's decision to abolish the Office of Tax Simplification (OTS).
Susan Cattell, ICAS Head of Tax Technical Policy, said:
“ICAS is a strong supporter of tax simplification. Complexity in tax law is reflected in tax administration systems that are difficult to use and do not help taxpayers to meet their tax obligations. Trust in HMRC and the tax system is undermined because many individuals and small businesses cannot understand their basic tax obligations. Complexity also gives rise to uncertainty which deters business investment.
“The OTS has had some notable successes, including the cash basis (introduced following the OTS small business review) but its effectiveness has been limited by government reluctance to adopt its recommendations, or to use the valuable OTS research and reports to develop alternative proposals to tackle complexity. We would have liked to see the government make better use of its work.
“As an independent body the OTS has had a valuable role as a bridge between government and a wide range of representative bodies, academics, advisers, taxpayers, and businesses – including many who would not otherwise have engaged with consultations on tax matters.
"There was no mention of a reprieve for the OTS in the Chancellor's speech, so it seems that HMRC will now be expected to undertake any work on tax simplification, in addition to its core role of administering the tax system. ICAS is concerned that unless HMRC is given additional resources specifically for this work, it is unlikely to happen. Tax simplification will not, therefore, make any progress, especially as HMRC is already struggling to provide acceptable service levels to taxpayers and will also need to provide support to businesses affected by the next stages of Making Tax Digital.”
Annual Investment Allowance
ICAS welcomes the continued £1 million Annual Investment Allowance (AIA) limit. Chancellor Jeremy Hunt has confirmed that the permanent AIA limit of £1 million announced in the Mini Budget will continue to be available.
Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes) at ICAS said:
"Since its introduction in 2008, AIA has provided businesses with an upfront incentive to invest in qualifying plant and machinery, the most notable exception being expenditure on cars. AIA is particularly useful for smaller businesses – for many SMEs setting the AIA limit at £1 million will mean that all capital expenditure in a year on eligible plant and machinery will be covered. Putting an end to changes to the level of AIA (which have been relatively frequent in the past) also removes the need for businesses whose accounting periods straddle the date of any change to pay careful attention to the timing of expenditure, to avoid losing out on relief.
The retention of AIA limit at £1 million may also be helpful to companies that have been able to take advantage of the current super-deduction regime or would have liked to claim a super-deduction but did not have the capacity to bring forward substantial expenditure. From April 2023, companies with taxable profits above £250,000 should still receive 25% Corporation Tax relief on qualifying additions up to the £1 million AIA limit (both thresholds having to be shared between companies under common control). Taking a long-term view, retaining the higher level of AIA (available to all businesses) may be more successful at encouraging additional expenditure over time."
Dividend rates
It was announced that the Dividend Allowance will be reduced from the current £2,000 to £1,000 from April 2023 and to £500 from April 2024. The Dividend Allowance operates by charging Income Tax at a rate of 0% on dividend income covered by allowance. Introduced in April 2016, the Dividend Allowance was initially £5,000 but reduced to £2,000 from April 2018, so reducing this further will erode the value of the allowance over time.
Taxpayers with dividend income have also been impacted on the change to dividend tax rates from April 2022, which increased by 1.25% to deter taxpayers from using dividends to avoid the increased National Insurance rates and anticipated Health and Social Care Levy. Although the National Insurance increase was reversed and Health and Social Care Levy abandoned, those increased Income Tax rates for dividend income will still apply. For those dividends not covered by the Dividend Allowance, Income Tax rates on dividends will continue to be 8.75% for dividends within the UK basic rate band, 33.75% for dividends within the UK higher rate band and 39.35% for dividends within the UK additional rate band. The taxation of dividends is not devolved, so the UK dividend rates apply throughout the UK.
ICAS believes that a key component of the UK being a competitive and attractive place to be located is a stable and consistent tax system, which allows both corporates and individuals to plan for the long term with certainty. Tax should certainly not be a disincentive – tax administrative systems must work and HMRC needs to provide an effective service to all businesses, large and small.
Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes) at ICAS said:
"Aside from the giving of tax relief, the Dividend Allowance has been an effective tool in simplifying the tax system and many taxpayers with dividends covered by the allowance may not currently require to pay tax on those dividends via Self-Assessment. Many more taxpayers will need to pay tax on their dividend income going forward, which is likely to increase the burden on HMRC at a time when our Members relay concerns about HMRC service levels.
In addition to the increased rates of tax on dividend income from April 2022, reducing the Dividend Allowance in future tax years also increases the tax burden on Owner Managed Businesses, as the Income Tax payable on extracting the profits from limited companies will be higher going forward. In some cases, this could impact the decisions businesses make on their operating structure, but this will depend on the circumstances and is something on which they should seek professional advice."
Energy windfall tax
ICAS notes the expansion of the Energy Profits Levy, which will increase to 35% from January 2023 and will now continue to March 2028. A separate Electricity Generator Levy will charge a temporary 45% tax on what is considered extraordinary returns from low-carbon UK electricity generation.
Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes at ICAS) said:
"In general terms, ICAS believes that windfall taxes have a limited purpose as successful businesses will generate larger profits and pay more tax; they are also likely to take on additional employees (who will pay tax and National Insurance) and pay larger dividends (with investors paying more tax). There are specific issues with the taxation of multinational businesses (particularly in the digital sector) because the international tax system has not kept pace with economic and technological developments.
These are however unique times, both politically and economically for the UK, given the current cost of living crisis and unprecedented energy bills for consumers. Whilst the tax burden for companies paying the levy has increased, the government has retained incentives for decarbonisation expenditure, which will encourage companies to take steps to move towards achieving net zero."
Vehicle Excise Duty on Electric Vehicles
Justine Riccomini, Head of Tax (Employment & Devolved Taxes) at ICAS said: “The increase in Vehicle Excise Duty on electric vehicles from April 2025 will not only impact private householder owners of electric cars, but will also create an additional cost burden for employers who provide electric vehicle fleets to their employees.
With electric vehicles still significantly higher in price than their combustion engine equivalent, the increase in VED is unlikely to accelerate the switch to Net Zero alternatives.”
Share schemes (CGT)
Justine Riccomini, Head of Tax (Employment & devolved taxes) at ICAS said:
"Share schemes which incentivise employees by way of a crystallisation of a Capital Gain on exit as opposed to an income tax charge may be likely to become less attractive if the individual making the gain has either used up their annual CGT exemption elsewhere already or is affected by the reduction in the CGT exempt amount on the sale of their shares.
Typically, such schemes are used in high growth and technically innovative organisations which can contribute to economic growth in the UK economy. An unintended consequence of the CGT annual exemption allowance reduction may be to limit the attractiveness of the UK to such businesses and the necessary talent for their success."
Share for share exchanges for "Non doms"
Justine Riccomini, Head of Tax (Employment & devolved taxes) at ICAS said: "The chancellor has brought in a measure which ensures that non-domiciled individuals pay tax on value built up on UK company securities in the UK, even when those securities are exchanged for securities in an offshore holding company. This is a valuable anti-avoidance mechanism which has been missing for some time and will hopefully be perceived by the public as a positive move as awareness of non-dom tax avoidance has been in the headlines recently."
Save the date
Join our tax team for an online panel discussion examining key aspects and outcomes of the budget and what this means for CAs on 13 December 2022 at 3.30pm.
