It was long awaited, and preceded by more speculation than usual about the UK tax changes we could expect from it, but the Chancellor of the Exchequer finally delivered his Autumn Statement yesterday. Some of that speculation, particularly on windfall taxes in the UK energy sector, was accurate and below is our summary of the main business tax points from that statement.
Energy Profits Levy
The Energy Profits Levy (EPL) was first introduced in May this year and charged a new temporary levy of 25% on UK oil and gas profits. On top of the existing 30% corporation tax rate and the 10% supplementary charge applicable to such profits, this took the headline tax rate for them up to 65%. This was accompanied by a new 80% investment allowance for the EPL which meant that for every £100 of qualifying expenditure, they would get a £91.25 tax saving. These measures were temporary, and would have ceased to have effect on profits accruing after 31 December 2025 or such earlier date as oil and gas prices reverted to more normal levels.
The Autumn Statement has increased the rate of the EPL to 35% with effect from 1 January 2023, taking the headline rate of tax payable on in-scope profits up to 75%. The investment allowance is to change so that the rate of the allowance remains at 80% for decarbonization expenditure (it wasn’t previously clear that decarbonization expenditure actually qualified for this allowance at all) while all other qualifying expenditure gets an allowance of 29%. The intention is to maintain the existing cash value of the investment allowance. In addition, it has been confirmed that the EPL will now stay in place until the end of March 2028, even if oil and gas prices reduce in the meantime.
Electricity Generator Levy
Alongside the increase to the EPL, the Government will now introduce a new Electricity Generator Levy (EGL) with effect from 1 January 2023.
The EGL is intended to levy additional tax on “extraordinary returns” of companies that undertake electricity generation in the UK from nuclear, renewable and biomass sources and are either connected to a national grid or local distribution networks. Extraordinary returns are to be calculated as those aggregate returns in the relevant period from relevant generation and which exceed an average output price of £75 per MWh. The EGL will cease to apply by 31 March 2028 and if electricity prices drop below £75 per MWh before that time, no levy would be due.
The EGL will apply on a groupwide basis and will be administered in the same way, and on the same timetable, as corporation tax. It will be subject to a de minimis exception so the only groups, or standalone companies, generating more than 100 GWh of electricity per annum will be caught by it, and it will be subject to a group wide allowance of £10 million per annum.
The EGL will not apply to battery storage, pumped storage hydroelectricity, or to coal or oil generation.
The currently available detail of the EGL has been included in a technical note from HM Treasury published alongside the Autumn Statement, but it is clear that the design of the levy has not been finalized. In particular, the applicable measure of revenue, and the way the EGL will apply to joint ventures, is to be considered further. HM Treasury and HM Revenue & Customs are to reach out to relevant generators to discuss implementation of the EGL and have invited interested parties who might be within the scope of the levy to contact them for further discussions.
The banking surcharge was introduced in 2016 and added an additional 8% of tax onto the profits of banking companies where they exceeded an annualized allowance of £25 million. Finance Act 2022 legislated for that rate to reduce to 3% on profits above an annualized allowance of £100 million with effect from 1 April 2023, and there had been some speculation that that reduction might be revisited given the need to repair public finances. However, the Autumn Statement confirms that this reduction will go ahead.
Online Sales Tax
The Government has for some time been considering and consulting on the introduction of a new online sales tax. The autumn statement has made clear that this proposal has now been dropped, and that a formal response to the consultation will follow shortly.
Diverted Profits Tax
Given the now confirmed increase of the main rate of corporation tax to 25% from 1 April 2023, it has also been confirmed that the rate of diverted profits tax is to increase from 25% to 31% with effect from the same date.
R&D Tax Reliefs
The RDEC rate is to increase to 20% (from 13%), while the additional deduction available to SME’s is to reduce from 130% to 86%, with the SME credit rate also reducing from 14.5% to 10%. All of these changes will have effect for expenditure incurred on or after 1 April 2023. The Government is also to consult on designing a single scheme for R&D tax reliefs and is to look at whether further support is necessary for R&D intensive SMEs prior to the next Budget.
OECD Pillar II
Pillar II, which broadly intends to create a minimum global effective rate of corporate tax of 15%, hasn’t yet been implemented in any state and hasn’t seen the kind of progress the OECD would undoubtedly prefer. However, there have been some positive developments in respect of it this year, with Germany, France, Spain, the Netherlands and Italy all saying they will adopt the model even if the EU cannot persuade the entire bloc to implement the proposals.
For the UK, the Government has committed to implement Pillar II in the UK for accounting periods beginning on or after December 2023. The UK rules are to include (i) an income inclusion rule to tax UK headquartered multinationals a top-up tax where foreign operations have an effective rate of less than 15%; and (ii) a qualified domestic minimum top-up tax which will have large groups, including those with operations exclusively in the UK, paying a top-up tax where UK operations are taxed at an effective rate of less than 15%.
The Government has also made clear they intend to adopt the Undertaxed Profits rule, which acts as a backstop to impose the effective 15% rate on payments to jurisdictions where income inclusion rules have not been fully implemented, but that this rule will have effect no earlier than accounting periods beginning on or after 31 December 2024.
Clearly, the energy sector has taken the brunt of the increase in business taxes made in this statement, with the EGL and the EPL forecast to raise a total of around £54 billion over the next six years.
However, while reductions in the business tax burden for all sectors would clearly be preferable, there are at least some welcome clarifications for the EPL and the availability of investment relief for decarbonization expenditure, while the EGL as it is currently designed is clearly preferable to a revenue cap for that sector which was also under consideration.
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