Chancellor Jeremy Hunt delivered his Spring Budget, accompanied by a full fiscal statement from the Office for Budget Responsibility. With the UK now predicted to narrowly avoid a recession in 2023, the Chancellor focused on delivering the government’s growth plans. A raft of measures were announced, including the extension of some business tax reliefs, ongoing funding for the levelling up agenda and targeted measures on childcare and pensions to encourage more people back into work.
Please reach out to your BDO FS Tax contact to discuss any of these developments in more detail.
General changes announced in the Spring Budget affecting Financial Services groups.
Capital Allowances
With the current temporary “130% super-deduction” due to expire on 31 March 2023, measures were announced to encourage continued business investment from 1 April 2023, when the main corporation tax rate will increase from 19% to 25%.
Full expensing and 50% first year allowance
“Full expensing” will be introduced from 1 April 2023 until 31 March 2026, allowing companies liable for corporation tax to benefit from a 100% first-year allowance (FYA) for capital expenditure on qualifying plant and machinery.
The 100% FYA will be available for expenditure on new and unused plant and machinery that ordinarily qualifies for the 18% main rate of writing down allowances. A temporary FYA of 50% will also be available for expenditure on new and unused special rate plant and machinery, including integral features in a building, and long-life assets that normally qualify for 6% writing down allowances. This represents no change from the former temporary 50% FYA that has been available since 1 April 2021 for expenditure on these assets.
More details on the announcement on full expensing can be found here: Spring Budget 2023 Analysis.
Annual Investment Allowance
As previously announced, legislation will be introduced to permanently increase the rate of the Annual Investment Allowance (AIA) from £200,000 to £1 million per annum for expenditure on qualifying plant and machinery. Although the AIA had been temporarily increased to £1 million since 1 January 2019, the AIA was due to return to £200,000 from April 2023. Fortunately, the complex transitional rules that apply to chargeable periods that straddle 1 April 2023 will no longer be required.
Overall, FS businesses will welcome the new and continued tax incentives to invest in capital assets, such as new IT equipment, given the end of the “super-deduction” for qualifying plant and machinery from April 2023. Further, given the preferential level of relief for special rate expenditure under the AIA, FS businesses will still need to consider the allocation of the AIA, particularly in the case of asset managers, between portfolio groups under control (where applicable) and incurring special rate expenditure.
UK adoption of OECD Pillar 2
Multinational top-up tax and domestic top-up tax
Much as we had predicted, the Government confirmed the introduction of the new multinational top-up tax to be levied on UK parent members within a multinational enterprise group. The introduction of the new multinational top-up tax will implement the UK Pillar Two legislation issued in draft on 20 July 2022. You can find our analysis of the draft rules here.
These measures will have effect in respect of in-scope groups’ accounting periods beginning on or after 31 December 2023 and have been adopted in order to comply with the global minimum corporate tax rate of 15% proposed by the OECD and agreed to by the G20 and 136 Members of the OECD Inclusive Framework. More details on the Spring Budget 2023 announcements on Pillar 2 can be found here: Spring Budget Analysis.
We will continue to monitor the progress of the Pillar Two rules and the implications for FS groups. But with the implementation date not far ahead, large multinational FS businesses should be considering the potential implications of the detailed rules for them now.
R&D tax reliefs
R&D reliefs changed again from April 2023
Reform of the UK’s R&D tax reliefs has been ongoing for several years and with yet more changes taking effect from April 2023, and others delayed until 2024, it is developing into a rather iterative process. So, it is important to keep up to date with the latest changes.
The Budget announcements included a delay in applying legislation preventing companies from claiming R&D relief in the UK for project work undertaken overseas to April 2024. However, the government will now bring forward the requirement for companies submitting R&D claims to supply an ‘Additional Information’ form with the claim (including details of the agent who was engaged to prepare the R&D claim) to 1 August 2023. HMRC believes that the new process will help reduce error and fraud in R&D claims, so it is perhaps no surprise that this has been introduced earlier than originally planned.
These R&D tax reliefs continue to offer significant incentives to FS businesses, who should consider whether they have any qualifying spend on an ongoing basis. More details on the measures announced regarding R&D can be found here: Spring Budget 2023 Analysis
Real estate investment trusts (REIT)
A number of reforms to the REIT rules announced in December 2022 have been confirmed and expanded upon. More details can be found here: Spring Budget 2023 Analysis
Pension changes
For higher earners, the ability to contribute into pensions has, up to now, been curtailed by two restrictions. The Annual Allowance (AA) restricts the amount a person can pay into a pension during a particular year. The Life Time Allowance (LTA) seeks to cap the size of the fund that accrues during your lifetime.
In Spring Budget 2023, the Chancellor has announced the abolition of the LTA and the raising of the limits for the AA to “help remove incentives for doctors to work reduced hours or retire early due to pension tax concerns.” However, the measures extend beyond just the healthcare sector meaning everyone can benefit from the changes.
Impact for employers
The increase in the AA and ending of the LTA may mean some, typically more senior employees, wish to participate in the workplace pension scheme when they had previously opted out. This will increase costs to employers who will need to make employer contributions, unless such employees currently receive an alternative form of compensation which will cease on participation in the pension plan.
More details on the pension changes announced can be found here: Spring Budget 2023 Analysis
Expansion of free childcare provision
The Chancellor has recognised that he must tackle economic activity and low productivity in order to grow the UK economy. So, with the intention of addressing the needs of the 435,000 parents of children aged under 3 years old, the government is expanding the provision of free childcare for working parents with children aged 9 months to 3 years old and earning less than £100,000. This ties in with a typical maternity leave period meaning fewer career breaks for parenthood.
Impact for employers
Not only will these proposals give employers access to experienced, skilled labour, they will also be extremely popular with many parents who do not want to take a career break while raising their families. The measures, alongside shared parental leave, may also reduce the gender pay gap as they should reduce the disparity in the career paths between women and men.
More details on the announcements regarding child care and employment taxes can be found here: Spring Budget 2023 Analysis.
FS specific changes and announcements
Review of the VAT treatment of financial services
We understand that the government will continue working with industry stakeholders to consider possible reforms to simplify the VAT treatment of financial services, with the aim of reducing inconsistencies and providing businesses with greater clarity and certainty. We await further information from the government on this topic moving forward.
Insurers
Write-downs for annuities products and insurers liabilities
This measure affects insurers who are in financial distress and have had their liabilities written down by a court under the proposed new section 377A of the Financial Services and Markets Act 2000 (‘FSMA 2000’). It also applies to individuals who hold annuities provided by insurers who are in financial distress and will apply from the date of Royal Assent of Spring Finance Bill 2023.
The effect is to mean that a write down of an insurer’s liabilities when it is in financial distress is not taxable and any subsequent write up of those liabilities will not be deductible. It is expected to apply to both general and life assurers.
Further, following a court mandated write down of insurance liabilities, the new rules also allow for a reduction of pre-2015 lifetime annuities and dependent annuities under registered pension schemes to not be considered a surrender of benefits and for those who subsequently receive Financial Services Compensation Schemed (‘FSCS’) top up payments under section 217ZA of FSMA 2000 to not suffer an unauthorised payment charge.
These measures are welcomed and will benefit insurers in financial distress by making sure there are no adverse tax charges at a time when their business is struggling.
Reinsurance in the course of transfer of BLAGAB
These measures were announced previously and applied from 15 December 2022. The intention of the new rules is to classify reinsured BLAGAB to be BLAGAB in the hands of the reinsurer when the reinsurance precedes a transfer of BLAGAB from one company to another. It also amends section 92 FA 2012 so that where substantially all the insurance risks in the BLAGAB being reinsured are assumed by the reinsurer, any amounts received under the reinsurance contract will not a deemed receipt in the I minus E computation.
These new rules should help aide situations where a transfer of BLAGAB is due to take place from one life assurer to another under Part VII FSMA 2000. The court process to allow such transfers can be lengthy, so the opportunity to put a reinsurance agreement in place prior to such transfer may be commercially beneficial. These amendments make the tax position of such a reinsurance agreement clearer.
Asset Managers
Qualifying Asset Holding Companies Regime
Certain refinements are to be made to the Qualifying Asset Holding Company (QAHC) regime that was introduced from 1 April 2022 to better align the qualifying conditions with the intended scope of the regime. Under the current rules, a QAHC could fail the investment strategy condition were it to acquire interests in listed shares outside of certain prescribed circumstances even though this may have occurred as part of normal, commercial dealings. The proposed changes will allow a QAHC to elect to treat listed securities as unlisted such that it continues to meet this condition, but it will be taxable on any dividend income received from those securities. The definition of qualifying entities will be amended to include entities that would be collective investment schemes if they were not bodies corporate and specifically exclude securitisation vehicles. The anti-fragmentation rule will be extended to exclude arrangements involving multiple QAHCs where the combined interests held by non-qualifying investors exceeds 30%. Amendments will be made to the chargeable gains exemption such that it works as intended where a QAHC invests in a derivative contract with an underlying subject matter of shares.
As part of a separate but related measure, the general diversity of ownership (‘GDO’) condition, relevant for assessing whether certain investment funds are qualifying investors for the purposes of the QAHC regime, will be extended to consider multi-vehicle arrangements holistically rather than on an entity by entity basis. This should mean that asset holding companies held by parallel fund structures which collectively should meet the GDO condition but would not on an entity by entity basis, will be able to benefit from the regime.
Carried interest - introducing an elective accruals basis
The government is introducing a new elective accruals basis of taxation for carried interest intended to assist individuals who pay tax in more than one jurisdiction. This will allow UK resident investment managers to make a voluntary and irrevocable election for their carried interest to be taxed at an earlier time than under the current rules. This acceleration in their UK tax liabilities is intended to align their timing with the position in other jurisdictions where they may obtain double taxation relief. This is a welcome measure which should particularly assist UK tax payers who are US citizens, who are potentially susceptible to taxation in the US on an earlier basis than under the existing UK tax rules for their carried interest. The new legislation will apply from 6 April 2022 – so an election can be made for 2022/23 (tax returns due by 31 January 2024). No draft legislation is yet available so we will have to wait to see the detail.
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