UK Tax: what should businesses be considering?

Corporation Tax Rise

We might be moving closer towards a global minimum tax rate (15%, achieving global consensus remains challenging!) but in the meantime, large UK companies should be prepared for the headline rate of corporation tax to increase to 25% from April 2023 (previously 19%). Early estimates are forecasting the UK could raise £11.9 billion in 2023/24.

Will this be an effective policy?

This represents a large increase when compared to the tax rates of the G7 nations (it puts us on a similar footing to the US and Canada) and whilst there are so many reasons why the UK remains a great destination for international businesses (I have a long list!) there is growing consensus that this policy could restrict some of the UK’s competitive advantage.

With that concern, and Astra Zeneca’s recent high profile decision to choose Ireland as home instead of the UK (their rate is 12.5%, but will be impacted by the OECD’s Pillar 2 work), there is growing thought as to whether the UK government could be contemplating another reversal.

The Chancellor’s Spring budget takes place on 15 March 2023, and whilst I think there is an outside chance of something happening, the likelihood of a complete turnaround on the planned increase is low. Some in the industry feel more optimistic, particularly given that there has been a lot of attention to how the UK is faring on the third anniversary of its exit from the EU, so watch this space.

In the meantime, the sensible advice is to plan for a higher rate and that is what I am saying to my clients. There are many planning opportunities to help reduce this impact and there are things across current allowances, reliefs and concessions that could be effective without being complex or aggressive. Your adviser will help you navigate this landscape and make sure you’re considering them.

Awarding Equity to Employees

Equity has never been more important as a tool to attract talent in a challenging labour market. The UK has long championed the very credible and successful Enterprise Management Incentives (EMI) share scheme, with many growing companies benefiting from this due to the favourable tax breaks awarded to valued employees.

To receive the benefits, you have to meet various conditions and for many companies, they will often be too large for EMI. The UK is making some key changes to the next most favourable approved share scheme – the Company Share Option Plan (CSOP) as a result of this.

It has removed some of the qualifying conditions that often meant the CSOP was not available for companies and crucially has increased the value of CSOP options you can now award to employees from £30,000 to £60,000.

Could the government have been more generous?

Perhaps, but this does afford a lot more flexibility to companies who want to provide tax approved stock options to their teams (remember CSOP options are not taxable on exercise). If you currently operate under CSOP, then it’s worth noting these changes take place from April 2023. This could influence the timing of your next equity awards, and for any new companies looking to explore the UK equity landscape who might be too big for EMI, I would definitely recommend thinking about the CSOP.

If you’re a UK employer operating a share plan or who has employees under a group share plan (perhaps in the US), then don’t forget you have reporting requirements under the UK’s employment related securities system.

Like all tax authorities, things are becoming stricter and there are penalties involved with non-compliance. Make sure you know the reporting requirements and deadlines particularly with the end of the tax year fast approaching (5th April).

Big Changes for R&D

There are some big changes on the horizon for R&D! The UK has long operated a very generous scheme for SMEs and will be scaling this back reducing the amount of tax relief and credits (cash payments) you can receive.

This has received a bit of criticism, but is in response to the emergence of fraudulent claims being identified by HM Revenue & Customs (HMRC).

On the other hand, there’s more positive news as the scope of what work qualifies for R&D has been expanded. The main development – which I think is key for many tech companies – is that services around cloud computing is now a recognised R&D activity.

The UK’s R&D scheme for large companies has also become more generous with the amount of tax relief on qualifying expenditure increasing from 13% to 20%.

Tech companies have long been attracted to the UK because of the R&D incentives, and having worked with many international companies, I know it’s crucial we continue to reward this important work.

I think the Research and Development Expenditure Credit (RDEC) changes are a step in the right direction. The government regularly releases data around the amount of research and development work performed in the economy and they want to encourage more firms to carry out this work and to benefit from the R&D schemes available. I think there’s good opportunity here for many software enterprise companies engaged with some level of technology to review what they do in the UK and consider if they might be eligible.

A More Flexible Workforce

A discussion on tax and remote workforces has become more of a centrepiece and will continue. Particularly with the evolution of employing people in 2023 and an increasingly borderless labour market.

Subcontractors

One of the lesser areas – but which is equally important – is around working with subcontractors. It can be a thorny issue worldwide if you have to deal with employment issues and risk involving what you thought was an independent contractor but for the purposes of this article, I’m focusing on the rules in the UK in respect of UK businesses or international groups with a UK subsidiary who engage subcontractors.

We’ve long had rules that deal with this area (referred to as IR35) but some of this legislation was subject to change (initially!) and a lot of debate last year.

These are the rules which put the responsibility to correctly classify (and crucially deal with any tax exposure) on the employing entity (the company) rather than the subcontractor.

The government planned to reform this rule – transitioning that responsibility from the company to the independent contractor – however that received a lot of attention and was subsequently reversed by the new Chancellor. This U-turn created confusion in the market around what actually changed and which rules continue to apply.

It is important to make clear that the IR35 rules as we know them are still in place. If you are a UK company that engages with subcontractors you will have responsibility to ensure these relationships reflect the reality of the working arrangement and you are managing any employment risk. That is a key area as the company could become responsible for employment matters, payroll reporting and the operation of withholdings for the individual and so it has never been a better time to review this area and make sure your business is complaint.

How ZEDRA can help

Our award-winning tax team is ready to advise you on all aspects of doing business internationally and accelerate your expansion into the UK, throughout Europe and beyond.

To discuss how these areas may affect your business, or anything else related to doing business in the UK, please get in touch with Adam Dunnett.