Autumn Statement 2022 – Financial Services Alert

For FS businesses, many of the announcements, such as the significant changes to R&D and the announcements regarding OECD Pillar 2 will have a direct impact. But, there were a few other announcements impacting Insurers and Banks specifically, including on Solvency II and the Banking surcharge.

General changes affecting FS groups

Corporation tax

The main rate of corporation tax will rise to 25% from 1 April 2023 for companies with profits over £250,000 following the reinstatement of the CT increase which was confirmed back in October. This rate is already enacted, so will be applicable to deferred tax balances for FS groups for accounting periods ending 31 December 2022.

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: UK legislates for OECD Pillar Two rules) in order to comply with the global minimum corporate tax rate of 15% proposed by the OECD. It is expected that the Pillar Two rules will generally apply to FS groups.

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. We will continue to monitor the progress of the Pillar Two rules and the implications for FS groups moving forward.

R&D tax reliefs

Responding to concern about significant abuse of the SME R&D regime and 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 repayable 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 – “RDEC for all”.

The measures follow on from the introduction of the SME PAYE and NIC cap for the repayable credit and the Autumn 2021 announcements on the prohibition of overseas R&D costs and broadening of qualifying expenditure to include data, cloud costs, and costs incurred on “pure maths” activities, such as actuarial and financial modelling.

While the changes will be welcomed by large companies, they represent yet another blow to early stage FinTechs who are undertaking genuine R&D and for whom R&D tax credits represent a valuable source of funding.

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. Many FS groups are large multinationals, so these rules are of significant interest.

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.

Read more on these changes here.

Diverted Profits Tax

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.

Capital Allowances

The announcement that the temporary increase in the limit of the Annual Investment Allowance (AIA) of £1 million per annum made permanent during the September Mini-Budget and this has not changed.

This measure will continue to benefit businesses investing in qualifying plant and machinery in the period from 1 April 2023 (particularly as the Corporation Tax rise from that date) and provide greater stability for planning investments. This will be of particular benefit to FS groups for spend on things such as computer equipment.

VAT

The Chancellor has confirmed that the current VAT registration threshold of £85,000 will be maintained until 31 March 2026.   While the status quo has not changed, this is a good reminder for FS businesses to monitor their registration thresholds and check if they have a VAT registration liability.  Due to the nature of FS businesses, some may provide exempt and/or taxable services.  The VAT registration threshold involves considering a) the value of taxable supplies to UK customers and b) certain services purchased from overseas.  The latter  can be commonly missed by FS businesses.  If there is no liability to register for VAT, depending upon the circumstances, it may still be beneficial to do so.  Please speak with us if you would like further information.

Employment taxes

Whilst July’s increase in the employee’s NIC threshold from £9,880 to £12,570 (aligning it with the income tax personal allowance) and the reversal from 6 November 2022 of the 1.25% NIC increase, due to the removal of the Health & Social Care Levy, was welcome news for employers, the subsequent freezing of NIC thresholds for employees and employers alike must come as no surprise. It does, however, represent a real-terms increase in employment costs for businesses over time with the secondary threshold remaining at £9,100 until April 2028.

NIC will invariably remain a substantial employment cost for both employees and employers and one that needs to be factored into remuneration strategies. It is one reason why salary sacrifice combined with appropriate benefit offerings is core to many of these, however the opportunity also to marry this to the ESG agenda is incentive enough for many. Cycle to Work schemes and the provision of Electric Vehicles (EVs) remain attractive in this context, and whilst we will see a 1% annual increase in the EV benefit percentage rate (currently 2%) from 6 April 2025, we do now have the certainty that it will go no higher than 5% before 6 April 2028. Although company cars have not perhaps been a traditional feature of remuneration packages in the financial services sector, certainly in London, it is a employee benefit offering which may be worth revisiting.

The reduction in the threshold at which the additional rate of income tax is paid, is likely to particularly affect the financial services sector.  One trap that some employees may already experience is the 60% effective rate of tax on taxable income between £100,000 and £125,140, which is an unfortunate consequence of the withdrawal of the £12,570 personal allowance (at the rate of £1 for every £2 of taxable income in excess of £100,000).  With income tax at a rate of 45% now to follow immediately thereafter, rather than at £150,000, the tax burden will be that much more noticeable.

FS specific changes

Banking Surcharge

The Banking Surcharge will reduce from 8% to 3% and will apply to profits over £100m (up from £25m), and so an effective tax rate of 28% will apply to such profits from 1 April 2023. This announcement was in line with expectations and will impact the largest banks specifically, as well as taking some of the smaller banks out of the remit of the surcharge - welcome news for them.

Solvency II

The government has published the outcome of its consultation on the regulatory regime for Insurers, Solvency II, saying it will legislate accordingly.

As part of the consultation response, the government has confirmed a number of changes including a “significant reduction in the Risk Margin”. These are regulatory changes rather than tax-specific ones because the life assurance and general insurance tax regimes are based on the statutory accounts rather than the regulatory return. However, there may be deferred tax implications for Solvency II reporting purposes. For regulatory purposes, insurers will need to assess the impact of the proposed changes on their capital position.

Other insurance-specific aspects

Sadly, the IFRS 17 tax regulations have still not been published but as IFRS 17 applies for accounting periods beginning on or after 1 January 2023 we would expect tax legislation shortly. The government has already announced the likely application of the tax rules to the transitional adjustment (broadly to spread it over 10 years for life assurers, with no spreading for general insurers), but the application of the detail of the regulations will be of interest when they are ultimately published.

Finally, for life assurers writing BLAGAB, the basic rate of income tax is to remain at 20% (as announced by the Jeremey Hunt in October), so there is no need to update systems to reflect a change in the policyholder tax rate to 19% as previously proposed.

Shared from BDO