Autumn Budget 2024: Companies and organisations

HMRC has published a result of the responses to the call for evidence published in February 2024. Following those responses HMRC has announced some next steps including consultations on:

• options to tackle high volumes of low value non-compliance
• new behavioural penalties to existing penalties for ‘inaccuracy’ and ‘failure to notify’
• ways to improve alternative dispute resolution and statutory review to resolve disputes before tribunal.

HMRC’s focus on non-compliance seeks to balance ways for taxpayers to ‘put things right’ while helping HMRC collect the right tax more effectively and efficiently.

The consultation explores ways to improve HMRC’s approach to correcting mistakes by ‘large numbers of taxpayers’, focusing on the proportionality of HMRC’s existing powers of correction and exploring ways to modernise and reform them. They are also exploring ways for taxpayers to self-correct their returns.

This power is something that has created dissatisfaction among taxpayers, questioning when HMRC can exercise that power, especially in situations where the taxpayer disagrees with the position HMRC has taken over a matter. It will be interesting to see whether this consultation provides sufficient reassurance to taxpayers while seeking to achieve the objectives laid down by HMRC.

Among all of the negative news on tax rises, the Chancellor had the opportunity to show the business community that she is serious about wanting growth by giving a boost to innovative companies in the UK.

It would have been an open goal to improve tax incentives for companies that invest in research and development (R&D). Unfortunately, the Chancellor missed the opportunity and so the UK lags behind other developed countries.

The R&D tax credit incentives available in other countries such as France, Ireland and Spain are substantially higher than the tax credit available to companies in the UK. Innovative companies take big risks when carrying out research and development; there is no guarantee that their R&D will result in successful profitable products and so they highly value government incentives such as tax credits.  

Given the substantially higher benefits in countries that are close neighbours of the UK, will we start to see a ‘brain drain’? Will companies that carry out R&D in the UK start exploring whether they can instead undertake R&D in Ireland, France or Spain? Clearly there are a number of factors to consider, but if the R&D tax credit in the UK and HMRC’s approach to perceived non-compliance are not improved this could happen.

The value of the R&D tax credit to UK companies has eroded in recent years because of changes made by the previous government to tighten up the schemes following reports of fraud or error. This tightening up has also changed the process for making applications.

Some of the changes are positive, increasing the efficacy of the UK’s R&D tax credit schemes. It is important to tackle non-compliance, those who don’t carry out qualifying R&D shouldn’t be allowed to claim it; however, the rigorous and some might argue, unreasonable, approach by HMRC to enquiries into R&D tax credit claims has resulted in a number of companies choosing not to make claims in the future. 

HMRC might take the view that this shows the positive effect that their enquiries have had in weeding out companies that should not have claimed. But the reality is different. Unless the approach to tackling non-compliance changes the trend could be that fewer qualifying companies will bother making claims because of the HMRC’s approach to enquiries, the erosion of the R&D tax credit benefit and the competitiveness of R&D tax credits available in other countries.

HMRC’s own statistics demonstrate this. The latest statistics (for the year 2022-23) show that there has been an overall 21% reduction in the number of companies that made a claim for R&D tax credits across the SME and RDEC schemes, compared with 2021-22. This is really significant as in previous years there had been a growth in numbers following HMRC’s intentional promotion of the schemes and encouragement for companies to make claims. 

But these statistics don’t take into account the changes of rates or establishment of a new merged scheme; these will be reflected in the statistics for FY24 and FY25. Will this see a further reduction in the number of companies choosing to apply for these potentially valuable tax incentives?

This affects companies that carry out R&D in the UK and provides a tax credit for qualifying companies in relation to their qualifying expenditure.

What information are we waiting for?

Companies operating in the UK see the significant value of innovation as this leads to opportunities, products and solutions that will lead to growth in the UK economy. The UK Government needs to listen to the innovative business community and find out what it can do to provide meaningful support to harness and retain innovation in the UK. By improving the tax credit available to companies carrying out R&D in the UK and improving the system of non-compliance the Chancellor and the wider government has a clear opportunity to start to show that the UK is open for innovative businesses. 

Under the banner of “Get Britain Working” the Chancellor has announced changes to employers' National Insurance Contributions (NIC).

• Lowering the threshold down to £5,000 from £9,100.
• Hike in the rate to 15% up 1.2%.

This will generate £25 billion.

Who does this affect and how?

This will impact all businesses and will increase the cost of employing people.

How does an increase like this encourage businesses to invest in more people?

Time and time again it has been shown that increasing the cost of employing people:

• puts a hold on opportunities to hire people
• reduces pay rises and bonuses
• increases the cost of goods and services, if the increase is pushed to the consumer.

We need businesses to flourish and in doing so to grow and expand their workforce, not to feel stifled by the ever-increasing costs of hiring more people.

The increase in employers NIC makes LLPs more attractive.

What's next

For Professional Practice firms, with the increase in employers' NIC, firms may want to look at their salaried partners again and consider whether it is time to promote them to fully fledged partners. However, it is not just a promotion - the individuals concerned will need to change their mindset on what it means to change from employee to partner.

It is usual for partners to have ‘skin in the game’ and this manifests itself as introducing capital into the business and a voice within the partnership group. Firms will need to be mindful of the salaried members legislation, which HMRC is challenging firms to show that the legislation is not driving the levels of capital being introduced.

The Chancellor set out a Corporate Tax Roadmap as part of her Budget today.

The overriding theme is to seek to provide an environment of corporate tax stability and predictability to enable businesses to make investment decisions. Providing UK businesses with a competitive position on the global stage.

The main feature of the Roadmap outlined was to provide predictability in the following areas.

• Corporate tax rates – capping the headline rate at 25% for this Parliament.
• Capital allowances – maintaining the current full expensing and Annual Investment Allowance regimes for this Parliament. There will also be a consultation launched in the coming months that explores the tax treatment of predevelopment costs.
• R&D tax reliefs – maintaining the current R&D Expenditure Credit scheme.
• Patent Box and intangible assets – maintaining the current schemes.
• Other reliefs – maintaining other reliefs such as AV and video game expenditure credits.
• International taxation – confirming there will be further consultation on transfer pricing and the maintain the UK’s Pillar 1 and Pillar 2 rules.

This Roadmap issued by the Chancellor is welcome and does provide businesses with some certainty as to the approach HMRC and Treasury are looking to take in the above areas.

We will be issuing further updates when more details on the areas outlined and any respective consultations are released.

The Chancellor announced changes to the taxation of carried interest as expected. 

From 6 April 2025 the Capital Gains Tax (CGT) rate associated with carried interest will increase by 4% (in line with the increase in underlying CGT rates) to 32%.

However, from 6 April 2026 the carried interest regime will be reformed to be taxed as trading income and subject to class 4 NIC, but with a specific reducer applied. The outcome of these rules is in essence a special rate of tax, which roughly equates to an effective rate of 34%.

This effective rate is broadly in line with the combined blended rate of tax that arises to carried interest currently (roughly 32% in practice, as only carried interest that arises as capital gains is currently taxed at 28% - carried interest that arises as interest or dividends is already subject to the higher rate of 45% and 39.35%). However, it does leave the UK at the top end in terms of international competition related to carried interest. This combined with changes to the non-dom regime might lead to individuals deciding to leave the UK to more preferential jurisdictions.

In addition, the current exemption from the Income Based Carried Interest (IBCI) rules (a set of rules that redesignates carried interest to be taxed as income where it arises from an investment scheme with an average holding period of less than 40 months) for employees who receive carried interest will also be removed from 6 April 2026. This means that firms will need to pay even more attention to IBCI monitoring if they are to ensure carried interest is not subject to the normal income tax rates of 47%. 

Draft legislation surrounding the above changes is expected in 2025 and further points of detail are likely to arise once information is released. 

The Chancellor announced increases to the rate of employer National Insurance Contributions (NICs) and also lowered the secondary threshold, the limit at which employers start paying employer NICs. Also announced were an increase to the main rates of National Minimum Wage (NMW) and Employer’s Allowance.

Who does this affect and how?

These changes will affect all employers in all sectors and industries, although it has been reported the NHS and public sector will be exempt from these changes. Employers will face additional payroll costs through increased employer NIC liabilities and an increased pay bill for employees paid at NMW rates.

However, businesses will benefit from an increase in the NICs Employment Allowance (a reduction in the employer’s NICs due) from £5,000 to £10,500. 

The increase to the employer NIC rate will rise to 15% from 13.8% and the level at which employer NICs become due is reduced to £9,100 from £5,000. These changes will become effective from 6 April 2025.

The financial impact to employers of these changes will amount to increased employer’s NICs of: 

• £866 on a salary of £30,000
• £1,226 on a salary of £60,000.

However, and particularly for smaller employers, the increased NICs Employment Allowance will help temper these increases. It is estimated some 865,000 employers will not pay NICs next year.

The increase in Capital Gains Tax from 20% to 24%, and the phased increase in the business asset disposal relief rate from 10% to 18%, will affect employee share schemes. However, an employee share scheme structured to deliver capital gains treatment remains more tax-efficient than a cash bonus, particularly given the increase in the rate of employer NICs. The increase to NMW pay rates equates to £27 per week for a full-time employee working 35 hours per week, or £1,400 annually. However, the employer’s payroll costs will also be likely to increase once the increases to employer NICs are taken into account.  

The wide ranging speculation before the Budget might have left employers expecting worse, but the increase to employer NIC rates and limits will leave employers to face tough choices in order to finance the additional payroll costs.  

The Chancellor announced a number of changes impacting employers with a globally mobile workforce. Key changes include: 

• UK non-dom status is abolished effective from 6 April 2025 and will be replaced by a Foreign Income and Gains (FIG) regime.
• Transitional arrangements (known as the Temporary Repatriation Facility) will be extended by an additional year (from two years to three years).
• Overseas Workday Relief (OWR) will be extended from three years to four years, however, the relief will be capped.
• Employers (in theory) no longer require approval from HMRC in order to restrict PAYE in respect of exempt income.

Who does this affect and how?

These changes will affect employers who have a globally mobile workforce. 

The introduction of the FIG regime should simplify tax administration of globally mobile workers and the extension of the Temporary Repatriation Facility should result in tax savings for those who wish to remit foreign income and gains to the UK. 

The changes to OWR should reduce the administrative burden on individuals and employers claiming mobility tax reliefs for UK inbounds. The benefits will flow to employers under tax equalisation arrangements.

The FIG regime will apply for individuals who become UK tax resident after a period of 10 consecutive tax years of non-UK residence. Qualifying individuals will not pay tax on FIG arising in the first four tax years after becoming UK tax resident and will be able to bring these funds to the UK free from any additional charges.

Where foreign income and gains arose in a tax year when the individual was taxed on the remittance basis (i.e. before 6 April 2025) and this income and gains is remitted to the UK after 6 April 2025, the taxpayer can elect to pay tax at a reduced rate on such remittances, for a period of three tax years from 6 April 2025. This is known as the Temporary Repatriation Facility (TRF). Under TRF remitted amounts will be charged to tax at a rate of 12% in tax years 2025/26 and 2026/27 and 15% for tax year 2027/28. The extension of these measures by an additional year is welcome as it encourages the transfer of monies to, and spending in, the UK. They could also save costs to employers under tax equalisation. 

OWR will become available for up to four years (an increase from three years) and even if the overseas workday income is remitted to the UK (a big change from under current rules) The relief will also become subject to an annual limit: the lower of 30% of the qualifying employment income or £300,000 per tax year. 

From 6 April 2025, employers can notify HMRC of their intention to exclude a proportion of a qualifying employee’s relevant pay from PAYE and operate PAYE on earnings relating to work. This is a welcome change for employers. We await how the theory being put into practice. 

What's next

These are some of the biggest changes we have seen in UK mobility taxation for at least a decade. Whilst some additional clarification on process and procedure would be welcome, these changes present significant tax saving opportunities for employees and employers, provided the necessary planning is undertaken upfront.