Autumn Statement 2022: a revenue-raising balancing act

The energy sector

It is no surprise that the Autumn Statement focused on the energy sector. The Chancellor of the Exchequer’s proposals represent significant tax-generating measures.

The energy profits levy was introduced in May 2022 and applies a 25% levy to inscope UK profits from extracting North Sea oil and gas. This levy will increase to 35% from 1 January 2023 and its duration will be extended from 31 December 2025 to 31 March 2028. There will also be a reduction in the rate of allowance for most investment expenditure from 80% to 29%. Only decarbonisation expenditure will continue to qualify for the 80% allowance.

In a widely anticipated move, the Chancellor also announced a new windfall tax: the electricity generator levy (EGL) of 45% on “extraordinary returns” from electricity generation in the UK. “Extraordinary returns” are the revenues made in excess of a benchmark price of £75 per MWh, subject to a group-wide de minimis of £10 million.

The EGL will apply to extraordinary returns arising on or after 1 January 2023, with some exclusions, and is scheduled to come to an end on 31 March 2028 (see box “Exclusions from the EGL”). It will apply on a group-wide basis, but only to groups generating more than 100GWh per year. Exactly how the EGL will apply to joint ventures is still under consideration and it is possible that bespoke rules will be introduced for this area.

Corporation tax rates

The Chancellor confirmed that, from April 2023, the corporation tax main rate will increase to 25%. In order to maintain the 6% differential from the main rate, diverted profits tax will, as previously planned, increase to 31%. The bank surcharge rate will reduce to 3%, resulting in an overall increase in banks’ combined corporation tax charge from 27% to 28%. These rate changes were all legislated for in the Finance Act 2022.

Exclusions from the EGL

The following electricity generation activity is excluded from the new electricity generator levy:

• Gas-generated electricity, as the sector is already incurring additional costs and is therefore not making excess profits.
• Oil and coal-generated electricity, as it makes up an extremely small and decreasing proportion of UK electricity generation and is already subject to a separate regime for taxing the use of fossil fuels.
• Hydro storage and battery storage electricity, as these activities should be encouraged as they provide flexibility at times of high customer demand.
• Electricity that is already subject to a contract for differences with the Low Carbon Contracts Company Ltd, the counterparty to the government’s contract for differences scheme, as these generators are not benefitting from a significant increase in the price that they receive. 

Research and development

The government announced a number of reforms to research and development credits in summer 2022. The announcements in the Autumn Statement were essentially a reallocation of reliefs to large businesses. The research and development expenditure credit will increase to 20% from 13%, while the additional deduction and credit rate available to SMEs will decrease from 130% to 86% and 14.5% to 10% respectively. 

Commitment to GloBE

While earlier this autumn there was some speculation as to whether the UK remained committed to implementing a global minimum tax (GloBE), the Chancellor confirmed in the Autumn Statement that it is (see Focus “OECD Pillar Two model rules: moving closer to a global minimum tax”, www.practicallaw.com/w-034-5157). The rules implementing the income inclusion rules, which require large UK-headquartered multinationals to pay a top-up tax in the UK where their foreign operations have an effective tax rate of less than 15%, will apply to accounting periods beginning on or after 31 December 2023.

The Chancellor also announced that the UK will be introducing a qualified domestic minimum top-up tax rule, which will require large groups to pay a top-up tax in the UK where their UK operations have an effective tax rate of less than 15%. The government confirmed that the introduction of the undertaxed payment rule (UTPR) will, as previously announced, be implemented no earlier than for accounting periods beginning on or after 31 December 2024 (see feature article “Tax efficiency of holding companies: holding back the fears”, www.practicallaw. com/w-037-1156).

Personal taxes

There were no changes announced to the rates of income tax, capital gains tax, inheritance tax or National Insurance contributions (NICs). However, revenue-raising changes were made to allowances and thresholds. The dividend allowance will reduce to £1,000 from April 2023 and then to £500 from April 2024. The capital gains annual exemption will reduce from £12,300 to £6,000 on 6 April 2023 and then to £3,000 from April 2024.

From April 2023, the income tax additional rate threshold will be lowered to £125,140 from £150,000. The income tax personal allowance and higher rate threshold will be frozen until April 2028, which is two years longer than announced at the Spring Budget 2021 (see News brief “Spring Budget 2021: the rebalancing act”, www.practicallaw.com/w-030-2568). The thresholds for NICs will also be frozen until 2028.

The Autumn Statement was notably quiet in terms of targeted publications from HM Revenue & Customs. The exception to this was a change to the share-for-share exchange rules for non-domiciled individuals holding at least 5% of a UK company before the share exchange. The new deeming rule means that where shares in a UK close company are exchanged for shares in a non-UK company, the non-UK shares are deemed to be situated in the UK and UK tax will be due on any gains on a future disposal. This also means that any dividends and other distributions will not be relevant foreign income for a UK-resident but non-domiciled individual; therefore, the
remittance basis will not be available for any capital or income. This is a highly targeted amendment and has immediate effect on share-for-share exchanges or schemes of reconstruction carried out on or after 17 November 2022.

Matthew Hodkin is a partner, and Susie Brain is Knowledge Of Counsel, at Norton Rose Fulbright LLP.

The Autumn Statement is available at www. gov.uk/government/publications/autumnstatement-2022-documents

This article first appeared in the December 2022 issue of PLC Magazine
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