Tax and trade changes - what to expect in 2023

We lived through a turbulent time of tax policy in the latter half of 2022, with announcements then reversals of the largest tax cuts for 50 years.  Now, the UK government seems settled on a course of substantial tax rises to deal with inflation and the fiscal deficit.  2023 will see some of the biggest of these tax raising measures start to take effect, on top of the fiscal drag already being caused by frozen allowances, leaving the UK with its highest overall tax burden since the 1940s.

Business groups, and sections of the Conservative party, are increasingly calling for new UK tax reliefs and subsidies to incentivise investment and economic growth – particularly given the international context of the US Inflation Reduction Act and the EU response in relaxing State Aid rules.

So far, the UK chancellor has resisted making any U-turns, but, at the Spring Budget on 15 March he is expected to present his four “Es” plan (Enterprise, Education, Employment and Everywhere), which is likely to include associated tax measures.  We’ll have to wait and see.  In the meantime, there are already a long list of tax changes legislated for, which businesses will be implementing this year.  We’ve collated these into a handy table and commented on the main themes below:

Key changes at a glance

Tax rises

The rise of the corporation tax main rate from 19% to 25% represents a real shift in direction for UK tax policy, ending decades of rate reductions in line with the global downward trend.  With a rate of 25% and a relatively broad tax base, this leaves the UK in a significantly worse position competitively, compared to OECD countries, leaving it in 33^rd place.

The ending of the super deduction which gave companies a 130% year one allowance, and was originally introduced to prevent delay of projects in the 2 year notice period, is likely to dampen investment appetites if nothing is introduced in its place. Business groups including the CBI are calling for alternative investment incentives, stressing the risk of the UK falling behind its international competitors.

The extension of windfall taxes even further at the Autumn Statement brings the headline tax rate on UK oil and gas companies to 75%, although retaining the 80% investment allowance for ‘upstream decarbonisation’ shows the government’s support for low carbon technologies. The legislation on the new 45% electricity generator levy is still in draft so changes are possible. Both levies are in force until 2028, but businesses are concerned that these will become permanent.

The personal tax burden will increase further from April 2023 as a result of reductions in thresholds and allowances. This, together with the previously announced threshold freezes, will bring more people into paying tax and paying higher rates of tax – the fiscal drag effect being exacerbated by high inflation levels.

Simplification of the tax system

Research and development (R&D) tax reliefs looks to be at the start of a major overhaul, with changes coming into force in 2023 and more on the horizon, as the government consults on a single R&D relief scheme to apply (if adopted) in 2024. The changes can be seen as a positive step to target support for legitimate claimants, by modernising the availability of claims to cover data and cloud services, simplifying and focusing the benefits of the reliefs in the UK.  The policy aim is to stimulate private investment for the UK’s most R&D intensive businesses including SMEs. Groups carrying out overseas R&D work may need to explore availability of local tax reliefs, or reconsider their R&D footprint.

Many self-employed individuals and partnerships with a year-end other than 31 March – 5 April will be dealing with the transitional rules of the basis period reform. While intended as a simplification, the reform is widely expected to cause practical difficulties for complex and/or international partnerships.

Increased compliance and reporting

Pillar Two will remain a hot topic for many large international groups with a turnover exceeding €750m, requiring time and effort this year to prepare to comply in 2024. Transactions taking place before the rules come into force may also have a Pillar Two impact.

The UK transfer pricing documentation requirements will be aligned with the OECD standard, as large businesses with a UK presence will be required to maintain, and provide on request, master file and UK local file documentation. For many large businesses this will not be a significant change. A further consultation on a Summary Audit Trail is expected this year.

Reporting rules for digital platforms do not come into force in the UK until 2024 but already apply in the EU from the start of 2023. UK platforms with EU sellers or facilitating rental of EU immoveable property should already be collecting the required information, while the ones with only UK sellers or facilitating rental of UK immoveable property should prepare to comply from 1 January 2024.

Tax transparency will continue to feature high on the agenda. While the EU public country by country reporting (EU PCBCR) requirements will not apply until 2024 (in most EU Member States), many large UK groups with significant EU presence will need to prepare in 2023, e.g., gathering data, aligning with financial reporting of taxes and Pillar Two compliance. Groups will need to agree with senior stakeholders whether to report the minimum required under EU PCBCR or more broadly in line with the overall tax transparency approach.

In conclusion

Following the tax policy turbulence during the Autumn of 2022, the government will undoubtedly be keen to maintain tax stability as an important element of the UK’s attractiveness to investors. With no room for major tax cuts, the government has signalled it is looking to simplify the tax system and increase certainty in order to make it easier to do business in the UK. The Chancellor’s stated ambition in his recent speech is “to have nothing less than the most competitive tax regime of every major country”, however, he made it clear this will take time.  In the meantime, as the tax changes summarised above show, businesses are facing significant tax rises and increased reporting requirements in 2023.

You can track the ever-evolving UK tax policy landscape by accessing our UK Tax Policy Map