UK Tax: what should businesses be considering?

Written by Adam Dunnett, Global Expansion Director at ZEDRA

We might be moving closer towards a global minimum tax rate 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 many reasons why the UK remains a great destination for international businesses, 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 tomorrow and, whilst there is an outside chance of something happening, the likelihood of that could be 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 its 3rd anniversary of its exit from the EU.

In the meantime, the sensible advice is to plan for a higher rate. 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. 

  1. 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 Incentive (EMI) share scheme with many growing companies benefiting from this due to the favourable tax breaks awarded to valued employees.

 

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

It has removed some of the qualifying conditions that often meant CSOP was not available for companies and has increased the value of CSOP options businesses 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 which want to provide tax approved stock options to their teams (remember CSOP options are not taxable on exercise). If businesses currently operate under CSOP, then it is worth noting that these changes take place from April 2023 as this could influence the timing of businesses next equity awards. And for any new companies looking to explore the UK equity landscape which might be too big for EMI, it could be worth considering the CSOP.

 

 

If a UK Company which operates a share plan or has employees under a group share plan (perhaps in the US), then they will 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. Hence, it is important to know the reporting requirements and deadlines particularly with the end of the tax year fast approaching (5 April).

  1. Research & Development

There are some big changes on the horizon for research and development (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) they can receive.

This has received a bit of criticism but is in response to the emergence of fraudulent claims being identified by HMRC. On the other hand, there is more positive news as the scope of what work qualifies for R&D has been expanded. The main development – which is key for many technology 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%.

 

Technology companies have long been attracted to the UK because of its R&D incentives and it is crucial we continue to reward this important work. The 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. There is 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.

  1. Flexible Workforce

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

One of the lesser areas – but which is equally important – is around working with subcontractors. It can be a thorny issue worldwide if businesses have to deal with employment issues or risk involving what they thought was an independent contractor but let’s focus on the rules in the UK and UK businesses or international groups with a UK-subsidiary who engage subcontractors.

 

The UK has long had rules that deal with this area (referred to as “IR35)” but some of this legislation was subject to change 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 business) 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 it are still in place and UK companies that engage with subcontractors will have responsibility to ensure these relationships reflect the reality of the working arrangement and 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.

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