Insights

Autumn Budget 2021: Financial services sector continued to be supported

  • Written By: Charlotte Spratt
  • Published: Thu, 28 Oct 2021 13:16 GMT

For the financial services sector, this Budget provided a continued focus on growth initiatives and encouragement to investment in the UK. 

Autumn Budget Financial Services 1920X1080

A Budget for the ‘Age of Optimism’

The Budget did not announce further substantive tax rises. This is in line with the Government’s message in the run up to the Autumn Budget that it wants tax rates to decrease by the end of the current Parliament, and a result of public finances being better than expected.

The Government’s focus on investment sees another temporary extension of the Annual Investment Allowance (AIA) for qualifying assets of £1 million from December 2021 to March 2023, and an increase in the scope of R&D from April 2023, to include data costs and cloud computing. The interaction between the future increase to the corporation tax rate and investment reliefs available will likely mean many businesses considering the timing of their investments. The increase in funding to Innovate UK to £1bn and the Global Britain Investment Fund to £1.4bn will we hope further encourage investment into the sector, particularly for growing FinTech and InsurTech businesses.

Promotion of the UK as a leading financial services centre

The Government has cut the bank surcharge from 8% to 3%, effective from 1 April 2023. This  results in a combined tax rate of 28%, rather than the original proposed rate of 33%, taking into account the increase in the main corporation tax rate to 25%. Additionally, a fourfold increase in the annual bank surcharge allowance from £25 million to £100 million aims to reduce the impact of increased tax rates in the sector.  These announcements are intended to allow the UK’s biggest banks to maintain their competitiveness and could also result in many challenger banks falling out of the regime.

As part of HMRC’s commitment to mitigate the tax cashflow impacts of accountancy changes, HMRC has announced an enabling power that will allow the Government to introduce regulations in response to new accounting standards.

IFRS 17 will impact the recognition of an insurer’s profits and losses. these proposals will spread transitional adjustments for tax purposes.

Further announcements for the insurance sector come by way of a clarification of the criteria to determine the location of risk for Insurance Premium Tax (IPT), ensuring that risk located outside of the UK remains exempt from UK IPT.

A new tax regime for qualifying asset holding companies (QAHC) has been announced, as part of the ongoing review of the UK funds regime announced in the Spring 2021 Budget. For QAHC investors (individuals, institutional and other entities) the new QAHC regime introduces a raft of new measures, from exempting gains and profits to allowing certain amounts to be treated as non-UK source income for qualifying remittance basis users. The new regime should increase the attractiveness for businesses setting up in the UK. There will also be various provisions to guard against abuse or avoidance

For traders and those in partnership, there is also a delay in the implementation of the previously-announced basis period reform proposals and a consultation on the reformation of the VAT treatment of fund management fees.

Other announcements

While a number of measures for multinational business have been announced, many of these are clarifications to already enacted legislation. Groups operating internationally may nevertheless want to undertake a review of their group structure and activities in light of these provisions.

In line with the continued effort to promote the attractiveness of the UK as a place to do business, a consultation into the re-domiciliation regime has been announced with the intention of allowing companies to redomicile to the UK, while still maintaining their legal corporate identity. This aligns the UK with other countries, such as Australia, Canada and the some states in the US. International groups considering restructuring may find this announcement useful, though we will have to wait and see what the outcome of the consultation is before businesses can benefit from any additional flexibility.

Other announcements impacting financial services groups operating internationally include:

  • further clarification to the anti-hybrid rules to ensure that entities that are transparent for tax purposes in their tax jurisdiction will be treated in the same way as partnerships under the current rules;
  • the repeal of the cross-border group relief rules and amendments to rules applying to losses of EEA resident companies trading in the UK through permanent establishments
  • a package of measures to reform the UK’s tonnage tax regime.

Welcome clarifications to complex tax rules came in the form of an amendment to the Diverted Profits Tax rules to allow a Mutual Agreement Procedure (MAP) potentially to be implemented, and that the proposed legislation covering uncertain tax treatments will initially include only two triggers for notification to HMRC, but the Government is actively considering a new third one.

Banking surcharge decreased from 8% to 3%

The rate of the banking surcharge will decrease from 8% to 3%. As the standard corporation tax rate is set to increase, banks will still pay a higher rate of tax than they do now with the combined tax rate on profits increasing from 27% to 28%.

The surcharge applies to profits in excess of the surcharge allowance, and this allowance will increase from £25 million to £100 million.

The Government committed to a review of the banking surcharge at Spring Budget 2021 in response to the announced increase of corporation tax from 19% to 25%. Following the review, the rate of the surcharge will be set at 3%, a reduction of 5% from 8%. This results in a combined rate of 28% for banks when taking into account the increase in corporation tax rate to 25% from 1 April 2023.

The surcharge applies to profits in excess of the surcharge allowance. Groups with banking companies currently have a surcharge allowance of £25 million. This has been increased to £100 million, increasing, therefore, the amount of profits banks can make before they pay the surcharge.

Our comment

Following the commitment of the Government to a review of the surcharge, the change will be welcomed by the banking sector. Whilst the combined rate of corporation tax and the banking surcharge still increases by 1% the potential effect of the corporation tax rate increase is less pronounced. In addition, the fourfold increase of the surcharge allowance to £100million will help to reduce the impact and could mean many challenger and small to mid-size banks will fall out of the regime.

The overall intention for the change is for the sector to remain internationally competitive, to continue to encourage growth for both challenger banks and FinTechs, and to promote competition for consumers.

Care will be required when calculating taxable profits for periods straddling the effective date. A time apportionment basis will be required to calculate the allowance and the 3% will apply to profits for the notional period commencing on 1 April 2023.

When will it apply?

From 1 April 2023

Business levy to fund anti-money laundering (AML) measures

The economic crime (anti-money laundering) levy will see some AML regulated businesses pay a fixed annual charge, calculated by reference to their annual revenues. Small entities, with UK revenue for the relevant accounting period of less than £10.2million, will be fully exempt. 

The new levy will be relevant for accounting periods starting from 1 April 2022 and applies to entities regulated under the Money Laundering, Terrorist Financing and Transfer of Funds Regulation 2017.

The charge will be a fixed annual fee calculated by reference to the size band of the business, which will be determined based on UK revenues. UK revenue is broadly defined as turnover plus other amounts recognised as revenue under generally accepted accounting practice, with appropriate adjustments for non-UK activities.

The precise amount of the annual levy is still to be determined but the following guideline figures have been provided:

Business size band UK revenue in period of account Annual levy in the region of
Small Less than £10.2m Exempt
Medium £10.2m to £36m £5,000 to £15,000
Large £36m to £1bn £30,000 to £50,000
Very large Greater than £1bn £150,000 to £250,000

 

The levy aims to raise £100 million per annum and it will be collected by HMRC, the Financial Conduct Authority, or the Gambling Commission. The amounts raised will be used to fund Government initiatives introduced as part of the 2019 Economic Crime Plan to help tackle money laundering.

Our comment

The businesses targeted by this measure already face severe penalties if they fail to meet their anti-money laundering obligations and have seen an increase in administrative costs in recent years as they responded to increasingly stringent regulations. These businesses will now be required to self-assess their obligations under the levy, and will not only suffer the cost of the levy itself, but will also see further administrative and professional costs in ensuring that they discharge their obligations correctly.

While there is a welcome exemption for some ‘small’ businesses, the decision to define ‘small’ by reference to revenue rather than profit means that the measure could disproportionately affect certain high-cost businesses. Furthermore, while businesses with higher revenue may be more likely to be able to bear the cost of the levy, there is no indication that those are the businesses that pose the greatest risk in respect of money laundering.

When will it apply?

The levy will first be charged on entities that are regulated during the period from 1 April 2022 to 31 March 2023. The first payments will not be due until after 31 March 2023.

Reform to research & development (R&D) tax relief following consultation

Following a consultation on the R&D tax incentive schemes, two major changes have been announced. First, the expenditure relating to cloud computing and data will be included within eligible spend. Second, the wider scheme is being reformed to better support and incentivise innovation taking place in the UK, and not that undertaken overseas. The full details of these changes are set to be announced in late Autumn.

The Government previously announced its goal to increase spending on R&D to 2.4% by 2027, representing an investment of £22 billion. Reforms to the existing R&D tax relief scheme aims to take the combined public direct and indirect support for R&D from 0.7% of Gross Domestic Product (GDP) to 1.1% of GDP by the end of the current Parliament. Despite the Government investing heavily, and the UK having the second highest spend on R&D in the Organisation for Economic Co-operation and Development (OECD), the investment into R&D by UK businesses is less than 50% of the average in the OECD.

The reform of the existing R&D tax reliefs are therefore designed to benefit and incentivise organisations undertaking R&D in the UK. Full details of the reforms and next steps for the R&D review are still to be published. The headline reforms announced are:

  • Cloud computing and data costs will now be included within qualifying expenditure
  • The Government will seek to better support and incentivise UK activity
  • Measures to tackle abuse and improve compliance

Our comment

The inclusion of data and cloud computing as qualifying expenditure for R&D tax relief is a welcome addition. The software and computer science industries are fast paced and as a result the R&D legislation, which was written over two decades ago, is not always relevant. To reward cutting-edge innovation, the legislation needs to be updated in a timely manner to reflect the dynamic R&D landscape.

The new eligible cost categories of data and cloud computing costs will allow companies to reap increased benefit from their innovation activities.

The Government’s decision to focus R&D tax reliefs on domestic activities will have an impact on many organisations that use foreign entities or globally mobile workers to support their R&D activities, either directly or indirectly. Many workers are choosing to work remotely from locations all over the world for various reasons. Global businesses are also increasingly sharing a workforce across jurisdictions. Local talent and skills are not always available to businesses when required, and so businesses sometimes rely on workers based overseas.

Currently, R&D tax relief is supporting billions of pounds worth of innovation that is taking place in foreign jurisdictions. Removing support for R&D activities conducted overseas is a stance that has already been adopted by a number of other OECD countries such as Australia, Canada, Switzerland, and the United States.

It is not yet clear how much of an effect this will have on businesses. The Government is yet to release detail on how it will refocus the reliefs towards innovation in the UK. While we support additional incentives for R&D taking place in the UK, consideration should also be given to ensuring that R&D tax relief is fit-for-purpose for modern business.

We eagerly anticipate the response to the R&D consultation that took place earlier this year.

When will it apply?

From 1 April 2023.

UK to ease corporate re-domiciliation to align with international competitors

Post-Brexit, in order to maintain and enhance its role as a global investment and business centre, the UK is to make it possible for companies to re-domicile to the UK by moving its place of incorporation here. This will allow continuity of business, reduce administration and negate the need to incorporate a new entity in the UK.

In order to align and compete with other common law global centres such as multiple US states, Canada, Australia, New Zealand, Singapore, and around 50 other jurisdictions, the UK will allow companies to re-domicile to the UK without the need for a new corporate identity. Permitting this re-domiciling will bring new investment and growth opportunities to the post-Brexit UK economy.

Corporate identity, structure, assets, contracts, and intellectual property will remain undisturbed.

The Government is consulting on the regime, including any required changes to tax laws, to facilitate re-domiciliation. Rules currently exist for companies that migrate control to the UK, but these may need to be extended; for example, to prevent importation of foreign losses to offset profitable group entities already within the UK.

Our comment

The Government has not specifically mentioned substance as a requirement. In reality, this may be a challenge. For companies considering re-domiciliation, a key test may be around management and control, for instance if an entity re-domiciles, but certain functions are not transferred with the re-domiciling entity.

The Government has not expressed an intention to allow re-domiciling between the three separate Registrars of Companies within the UK.

When will it apply?

Consultation concludes on 7 January 2022.

DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Ref: NTNPW1021101

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