Corporate Tax News Issue 65 - February 2023

Spring budget 2023: What business tax changes can we expect?

There is no denying that Jeremy Hunt’s Autumn Statement speech in November 2022 was a dour affair, relying on freezes to tax allowances and bands to raise future tax revenue. But with both the Chancellor and the Prime Minister keen to demonstrate that they are more than caretakers in their roles until the next General Election, can we expect any significant announcements to business tax on 15 March (for prior coverage, see the tax alert dated 23 November 2022)? 

Business tax changes

In a recent speech, the Chancellor set out his four pillars for growth as Enterprise, Education, Employment and Everywhere, and it will be interesting to see how he follows through on these with tax announcements. 

With the main rate of corporation tax rising to 25% from 1 April, it is unavoidable that the UK will be seen as a less attractive location for international businesses. Clearly the Chancellor will want to mitigate this impact as far as possible—hopefully with credible announcements that go beyond the “boosterism” that often accompanies a Budget speech. Pre-announcing future tax cuts to corporation tax (towards his stated goal of giving the UK “the most competitive tax regime of any major country”), perhaps over a period of five years in some form of corporate tax roadmap, may help to restore much-needed certainty to business planning decisions. 

However, the government’s cashflow needs remain pressing. According to the Office for Budget Responsibility, the much-debated windfall taxes on energy producing companies have not, to date, generated the levels of tax revenues that were originally envisaged (for prior coverage, see the article in the November 2022 issue of Corporate Tax News). Whether the Chancellor responds by tightening the rules and/or broadening the base of the tax or simply accepts lower revenue levels will be an important signal for his future approach to business taxes. It is highly unlikely that he will seek to make up any shortfall by allowing fuel duties to rise: it has already been leaked that the Chancellor intends to continue the freeze in duty rates to help reduce inflation. 

There are a number of other small measures the Chancellor may announce to attract businesses to the UK. The government has already consulted on ways to encourage “corporate re-domiciliation,” i.e., changing a company’s place of incorporation to the UK while maintaining its legal identity as a corporate body. It would be possible to push ahead with these changes without significant immediate tax revenue implications, with the aim of sending a signal that the UK remains open for business.

Attracting businesses to the UK through the existing freeports developments will likely feature in the announcements, and the Chancellor’s first steps toward creating new investment zones in under-performing areas of the UK to boost high growth industries will probably be announced. Exactly how these investment zones will be underpinned with tax incentives or grants remains to be seen. 

On a smaller scale, it is interesting that other countries, most recently Spain, have announced fixed period tax breaks (e.g., for their first five years of trading) to encourage international entrepreneurs to set up businesses in their country. Similar proposals may be attractive to the Chancellor, at least while the rate of corporation tax remains high, and a consultation on such proposals might be considered. To help protect existing UK businesses, the Chancellor may consider creating some form of import levy like the EU’s proposed carbon border adjustment mechanism that is intended to apply to goods that are produced by generating higher carbon emissions than EU production methods. This has been rumoured as part of a deal to help finance UK steel producers in moving to less carbon-intensive forms of production, but could eventually have a wider application as part of the UK’s net zero strategy.

The government’s commitment to the OECD’s two-pillar reform to international taxation is likely to again be confirmed, with research showing that the Pillar Two 15% minimum corporate tax rate provisions are expected to be tax-raising for most jurisdictions. The UK is set to implement the Pillar Two rules for accounting periods commencing after 31 December 2023, and we may hear more on UK implementation of Pillar One. 

Similarly, it would be surprising if there were to be no new announcements of tax anti-avoidance measures, as clamping down to close the UK’s estimated GBP 32 billion tax gap is probably the easiest way to raise revenue both in terms of the impact on the economy and in political terms. For example, announcing specific enforcement action against the estimated 10,000 or more overseas companies owning UK residential property that did not register with Companies House by the 31 January 2023 deadline and declare the beneficial owners of the property. The government’s own figures show that for every GBP 1 invested in investigation work HMRC collects an additional GBP 18 in tax revenue, so further investment here seems prudent. 

Environmental issues

Given the Chancellor’s stated focus on reducing inflation, as with fuel duty, it seems highly unlikely that immediate new green taxes that put up costs to businesses or add directly to retail costs will be announced. However, that does not mean that taxes will be removed from the government’s toolkit for achieving net zero carbon emissions. The government will still see taxes as influencing future consumer behaviour and as a good source of income; for example, using road pricing as a way to replace revenue lost from fuel duties as we switch to electric cars. Further consultations on reducing single use plastics may be announced, as well as future rule changes to tighten up existing green taxes (e.g., a future increase in the 30% recycled plastic threshold for an exemption from the plastic packaging tax). 

The Chancellor can be expected to point out that, post-Brexit, much change can be achieved through regulatory means. For example, the government may choose to insist on uniformity for electric car charging connections and power input, and put new planning rules in place to require charging point installation for new commercial property development sites over a certain size.

Jonathan Hickman