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Welcome to the Winter 2023/24 edition of our bi-annual tax horizon scanner. Read on to find out what tax changes businesses need to prepare for in the coming months.
For some time, HMRC has been concerned about serious tax non-compliance within the construction sector. As a result, measures have been announced which will prevent non-compliant subcontractors from benefiting from gross payment status under the Construction Industry Scheme (CIS).
One of these measures will toughen the statutory compliance test which subcontractors must satisfy in order to be granted, and retain, gross payment status by adding compliance with VAT filing and payment obligations to the test. In addition, the first review of a gross payment status holder's compliance history will be brought forward from 12 months after application to 6 months after application.
Other reforms to the CIS will include the removal of the majority of landlord to tenant payments from the scope of the CIS.
Changes will take effect from 6 April 2024.
In April 2023, HMRC issued a consultation on CIS reform seeking views on possible changes to strengthen and simplify the CIS.
The consultation considered whether it would be appropriate to add VAT to the list of taxes HMRC must consider when undertaking the statutory compliance test for receiving or keeping Gross Payment Status (GPS). Currently, in order to gain and maintain GPS, subcontractors must pass three tests – (i) compliance, (ii) turnover and (iii) business. The compliance test currently comprises compliance with certain CIS, PAYE, ITSA and CTSA obligations.
In response to issues raised by HMRC's Construction Forum, the consultation also sought views on two other areas which were perceived to be causing unnecessary administrative burdens:
Currently, payments made by commercial landlords to tenants can fall within the scope of the CIS if they are in respect of building works that are the landlord’s responsibility. However, there is a lack of clarity in relation to which landlord to tenant payments are within the CIS and which fall outside its remit. The consultation sought information on the commercial reasons for the making of these types of payment and how they interact with the CIS, and requested potential solutions.
The consultation proposed that the administrative issues faced by group companies in connection with the operation of the CIS could be addressed by introducing a group arrangement whereby a single company within a group would be nominated as being responsible for submitting a single monthly group CIS return on behalf of all companies in the group.
A response to the consultation paper was published to coincide with the Chancellor's Autumn Statement on 22 November 2023, when the forthcoming reforms to the CIS were announced.
From 6 April 2024:
The legislation implementing these changes is contained in the Finance Bill 2023-24, originally published in November 2023.
The implementing legislation also extends one of the grounds for HMRC to cancel gross payment status with immediate effect. VAT, corporation tax self-assessment, income tax self-assessment and PAYE will be added to those taxes where HMRC is able to withdraw GPS if they have reasonable grounds to suspect that the GPS holder has fraudulently provided an incorrect return of incorrect information.
In response to the CIS consultation, in which it was stated that the overwhelming majority of respondents were of the view that landlord to tenant payments should not be in the scope of the CIS, the government intends to change the exemption criteria for landlord to tenant payments. The draft regulations implementing the changes, due to take effect from 6 April 2024, were published for consultation in December 2023.
The draft legislation (The Income Tax (Construction Industry Scheme) (Amendment) Regulations 2024) will exempt payments from the CIS which are made by a landlord to a tenant and which satisfy the following conditions:
1. the payment is for construction operations agreed as a consequence of a lease agreement;
2. the construction operations relate exclusively to parts of the property which the tenant occupies (or will occupy); and
3. there is a written contract between the tenant and the person undertaking the construction.
The proposal is welcome as it should remove the existing ambiguity and complexity in cases where payments are made by a landlord to a tenant for “fit-out works” and which can lead to such payments falling within, and therefore being subject to deductions of tax under, the CIS.
No further consultations on any aspects of the CIS have been published. However, the government's response to the CIS consultation noted that no effective and timely way to give effect to a group arrangement has been identified. Therefore, the government will not legislate to introduce a grouping arrangement. The response also noted that the government intends to use information provided as part of the consultation to explore other options to address the impact of the CIS on certain groups. Accordingly, it is possible that a further consultation to explore potential solutions to these issues may be announced in the coming months.
The strengthening of the statutory compliance test will be of limited impact for compliant businesses, although they will still need to familiarise themselves with the new GPS requirements.
We expect the proposal to remove the majority of landlord to tenant payments from the scope of the CIS to have a significant and beneficial impact on businesses. Businesses will want to:
On 23 November 2023, the government issued a policy paper announcing the merger of the current small or medium enterprise (SME) research and development relief scheme (SME scheme) and the research and development expenditure credit scheme (RDEC scheme).
The aim of the merger is to simplify and improve the system, helping to drive innovation in the UK.
The rate offered under the merged scheme will be implemented at the current RDEC scheme rate of 20%. The notional tax rate applied to loss-makers in the merged scheme will be the small profits rate of 19% (rather than the 25% main rate set in the current RDEC scheme).
The merged scheme will take effect in relation to accounting periods beginning on or after 1 April 2024.
The RDEC scheme and the SME scheme are currently separate reliefs and operate differently in how they provide relief, and what relief can be claimed for.
The government launched a review of these research and development (R&D) tax reliefs at the Spring Budget in March 2021. In that consultation, the government recognised that R&D tax reliefs have a key role in incentivising investment in R&D by reducing the costs of innovation. The purpose of that consultation was to explore further with stakeholders:
In the Autumn Statement 2022, the government announced that as part of the ongoing review of the R&D reliefs it would consult on the design of a potential merged scheme with the possibility of that scheme coming into effect from 1 April 2024. That consultation was launched on 31 January 2023.
Although no decision on implementing a merged scheme was made following the January 2023 consultation, draft legislation for a merged scheme was published in July 2023 for technical consultation. It was intended that the potential merged scheme would apply to expenditure incurred from 1 April 2024.
In the Autumn Statement 2023, the government announced that it would legislate in the Autumn Finance Bill 2023 to merge the RDEC scheme and the SME scheme.
The new merged R&D scheme will apply to accounting periods beginning on or after 1 April 2024 (this timing differs from the original proposal and therefore will give some companies additional time to prepare for the changes to the merged scheme).
The merged scheme will be based on the RDEC scheme, with companies receiving an above the line credit. A credit rate of 20% will apply (mirroring the rate available under the current RDEC scheme) although the notional tax rate applied to loss-makers in the merged scheme will be the small profits rate of 19%.
Notably, the merged scheme will change the way in which claims for contracted out R&D are dealt with. It will also allow the company making the decision to do the R&D and bearing the risks to claim the relief. This means that:
In addition to the merged R&D scheme, changes will be made to enable more SMEs to become eligible for the enhanced support currently only available for R&D intensive SMEs. A company is currently considered R&D intensive where its qualifying R&D expenditure is 40% or more of its total expenditure (the "intensity threshold"). With effect from 1 April 2024, the "intensity threshold" will be reduced to 30%.
A one-year grace period will also be introduced for accounting periods beginning on or after 1 April 2024. This means that a company which fails to meet the intensity threshold (for example, as a result of small fluctuations in expenditure) can continue to claim the enhanced support in that year provided that it:
1. met the intensity threshold; and
2. successfully claimed enhanced support in the previous year.
The 2023 policy paper notes that:
Given the merged R&D scheme will take effect within the next three months, businesses will need to take swift action to prepare for the changes. This includes reviewing their R&D claims and considering what changes to their methodology may be required, as well as how the changes will impact the amount of R&D relief available post 31 March 2024.
It was announced at the Autumn Statement 2023 that capital allowances full expensing will be made permanent, allowing businesses to write off the full cost of investment in "main rate" plant and machinery.
The changes will be implemented with effect from Royal Assent to the Finance Bill 2023-24.
From April 2023, companies have been able to claim 100% capital allowances on investments in "main rate" plant and machinery – "full expensing". This enables companies to claim a 100% in year deduction in respect of the expenditure on the relevant plant and machinery.
The expenditure must be incurred by a company, and to qualify for full expensing, the plant and machinery must be new and unused, and must not be a car given to the company as a gift or bought to lease to someone else.
Full expensing was introduced to boost investment in business, perceived by the government as a long standing weakness in the UK.
When full expensing was introduced at the Spring Budget 2023, it was intended to be temporary, applying only to investment in the period from April 2023 until the end of March 2026. As a result of the measure, full expensing will become permanent.
Companies should be aware of the change to full expensing as it can be a valuable capital allowance for companies. Businesses should take this change into account in planning their future investments and assessing the impact of such investments on their profits.
Enterprise management incentive (EMI) options are a form of tax advantaged employee share option. Currently, in order for an EMI option to qualify for the associated tax advantages, the company granting the option must notify the grant of the EMI option to HMRC within 92 days following the date of grant.
The time period for notifying HMRC of the grant of an EMI option will be extended to 6th July following the end of the tax year in which the grant was made.
Changes will take effect for options granted on or after 6 April 2024.
In March 2021, HM Treasury published a call for evidence to review the EMI scheme and ensure that it provides support for high-growth companies to recruit and retain the best talent. The government's response to the call for evidence was not released until the Spring Budget in March 2023, when the government announced that in order to reduce the administrative burdens of operating an EMI scheme, the following changes would be made:
The first two measures were implemented with effect from 6 April 2023 by the Finance (No. 2) Act 2023.
EMI options granted on or after 6 April 2024 will need to be notified to HMRC by 6 July following the end of the tax year in which the EMI option was granted. The implementing legislation is included in the Finance Bill 2023-24 (published in November 2023).
No changes to the process for making the EMI option grant notification to HMRC are being made. This means that in order to notify the EMI option grant, the company will still need to ensure that the arrangement under which the EMI option is granted is registered with HMRC online (together with a unique reference number for that arrangement issued by HMRC – it can take up to 7 days for HMRC to approve the registration). The actual EMI option notification will need to be submitted to HMRC using HMRC's ERS online filing system.
As a result of the extension to the time limit for notifying the grant of an EMI option, a change will also be made to the EMI legislation to provide that the 12 month period during which HMRC can issue a notice to enquire into an EMI option will commence on 6th July following the end of the tax year in which the EMI option was granted.
Companies granting EMI options on or after 6 April 2024 should be aware of this change. Our recommendation remains that the grant of EMI options should be notified to HMRC as soon as possible following the date of grant to ensure that this crucial step is not overlooked, and the tax advantages lost.
EMI options granted prior to 6 April 2024 must still be notified within 92 days of their date of grant, even where that notification period extends beyond 6 April 2024.
It should be noted that the requirement to notify the grant of EMI options remains a separate requirement to the company's obligation to complete and submit to HMRC an annual return in respect of its EMI option arrangements by 6th July following the end of each tax year.
The government announced at the Autumn Statement 2023 that VAT relief available on the installation of energy-saving materials (ESMs) will be extended to additional technologies (such as water-source heat pumps) and to bring buildings used solely for a relevant charitable purpose within scope.
The changes will take effect from 1 February 2024.
In the Spring Statement 2022, the government announced the expansion of the VAT relief for the installation of certain ESMs (previously available only in relation to residential accommodation) to include wind and water turbines as qualifying materials. It also introduced a temporary VAT zero-rate in Great Britain for qualifying installations including heat pumps and solar panels.
Subsequently, a call for evidence was published, seeking views on:
The government's response to the call for evidence was published on 11 December 2023.
On 10 January 2024 the Value Added Tax (Installation of Energy-Saving Materials) Order 2024 was made. Consequently, from 1 February 2024, the VAT relief on ESMs (which currently applies a zero rate) will be expanded to include the following technologies:
A list of groundworks necessary for the installation of certain types of heat pumps will also be included within the relief.
The relief will also be extended to include the installation of all qualifying ESMs in buildings used solely for a relevant charitable purpose and will continue to apply when these ESMs are installed in residential buildings.
The expansion of the relief will apply across the UK as a result of the Windsor Framework.
The VAT zero rate for ESMs is temporary and will expire on 31 March 2027, when the installation of the technologies to which the VAT relief applies will revert to the VAT reduced rate of 5%.
Businesses involved in the installation of energy-saving materials should consider if, and how, the expansion of the VAT relief will impact them.
A measure was announced at the Autumn Statement 2023 to amend the off-payroll working rules in circumstances where a "deemed employer" is required to account to HMRC for income tax under PAYE and NICs in respect of payments made to a "deemed employee" resulting from an incorrect determination of a worker's status.
As a result of the amendment, HMRC will have the ability to set-off amounts of income tax and NICs already paid by a worker and their intermediary against the PAYE income tax and NICs liability of their deemed employer.
The change will apply to income tax and NICs liabilities assessed under PAYE on or after 6 April 2024 in respect of payments made from 6 April 2017.
The off-payroll working rules apply where a worker who provides services to an entity ("client") through their own intermediary would have been an employee if they were providing their services directly to the client.
It is the responsibility of the client to determine the employment status of each worker who provides their services through their own intermediary, and to inform the worker of their determination in the form of a status determination statement.
If the client determines that a worker would not have been an employee if they had provided their services directly to the client, then the engagement is outside the off-payroll working rules. As such, no deductions in respect of income tax under PAYE or NICs are required to be made by the client (or another party in the labour supply chain) in respect of payments made by the client to the worker (or their intermediary).
However, if HMRC finds that the employment status determination made by the client is incorrect, the client or an agency further down the labour supply chain (the "deemed employer") is then liable for the income tax and NICs that should have been deducted by the deemed employer from the payments made to the worker (or their intermediary) by the client.
Currently, the off-payroll working rules do not permit any income tax or NICs paid by the worker or their intermediary to be deducted from the PAYE income tax and NICs that the deemed employer is required to pay to HMRC where the liability arises from the client making an incorrect employment status determination.
A consultation was published in April 2023 in which the government sought views on the proposal to amend the legislation to address the potential over-collection of tax. The government's response to that consultation concluded that the proposal would be implemented following the largely positive response to the proposal from respondents.
From 6 April 2024, if a deemed employer is required to pay income tax under PAYE and NICs in respect of payments made under an engagement incorrectly determined by the client to be outside the off-payroll working rules, then the amount of income tax and NICs recoverable from the deemed employer will be reduced by the income tax or corporation tax already paid or assessed in relation to that engagement.
The changes will apply in relation to payments made by the client in respect of the engagement on or after 6 April 2017.
Businesses should be aware of the change and those with an open HMRC compliance check should consider whether to ask HMRC to pause the settlement until after 6 April 2024. HMRC's December agent update provides that HMRC will consider a pause if:
HMRC advises organisations who seek a settlement pause to make a payment on account for the full amount to stop statutory interest increasing.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2024. Specific advice should be sought for specific cases. For more information see our terms & conditions.
22 January 2024