25th January 2023
After two years dominated by the pandemic, 2022 was a year of political and economic turmoil, with Russia’s invasion of Ukraine, COVID-19 variants, rising interest rates, inflation at a 40-year high and uncertainty abounding. All of these persist into 2023, but Melanie Pittas, Partner and Co-Head of Financial Services, considers the other key topics likely to prevail in the new year under a new, “new normal” and has listed the top six of these matters to watch out for below.
1. Increasingly competitive UK regulatory landscape – the Edinburgh Reforms, the Chancellor’s “bold collection of reforms”, build on the Financial Services and Markets Bill which is currently going through the House of Lords and, given the UK’s world-class positioning as a financial centre, the UK Government is expected to use regulation as a means of demonstrating its commitment to the Financial Services sector and increasing competitiveness in a post-Brexit world.
2. Higher tax burdens – a raft of tax rate changes come into effect from April 2023 following 2022’s mini-budget, numerous U-turns and Autumn Statement, mostly increasing tax rates or reducing reliefs or thresholds – but it’s not all bad news:
- The main rate of Corporation Tax will increase from 19% to 25%. For periods straddling April, profits will be pro-rated; however
- The Annual Investment Allowance for capital expenditure will become permanent at a rate of £1m
- R&D limits will change:
i. Small and Medium-sized Enterprises additional deduction will decrease from 130% to 86%
ii. SME credit rate will decrease from 14.5% to 10%; however
iii. Research and Development Expenditure Credit rate will increase from 13% to 20%
- The Banking Surcharge reduces from 8% to 3% and will apply to profits over £100m, so a tax rate of 28%
- The income tax additional rate (45%) threshold will be lowered from £150,000 to £125,140
3. Spotlight on structures – given the well-publicised black hole that the UK Government needs to fill following several years of dramatic spending, it would be prudent to assume that HMRC might look to plug the deficit by ensuring that existing taxpayers are paying what they should. This might mean that HMRC take a closer look at structures and try to marry them with corresponding anti-avoidance rules to see if they can be squeezed further.
We are seeing a number of queries from HMRC in respect of entries on tax returns that would usually be considered fairly immaterial. It makes sense, with a fresh year ahead, to ensure that your business is in a position to defend itself robustly from HMRC challenge and, more importantly, that you identify risks early so that these can be addressed in good time. Some questions to ask yourself:
- Is your structure fit for purpose? UK Asset Managers operate on an international stage with such structures guaranteed to include an entity in a ‘tax friendly’ jurisdiction. It is advisable to review your structure to make sure that activities are still being carried on where you originally thought they were, remembering that a lot of the anti-avoidance rules in place are designed to specifically target international relationships that might lack substance.
- Has there been a change in your investment strategy, perhaps even only gradually over time, which might impact how your UK operations are viewed by HMRC? It is advisable to undertake a review of the conditions of the Investment Manager Exemption regularly to ensure that the risk of a UK Permanent Establishment being created is managed.
- Have any new members been admitted to your LLP, and are these individuals really members? These rules have not gone away!
4. Ongoing war for talent – the UK labour market remains very tight, with unemployment at an historical low of just 3.7% and a significant gap in the skilled workforce. This is in large part due to the tandem effects of an increase in early retirement and long-term sickness levels, both of which can be attributed at least in part to the impact of the pandemic; the latter linked to long COVID, lengthy hospital waitlists and a mental health crisis amongst (typically) younger generations. This combines with protracted strike action to continue to stifle business growth across most sectors. Challenges in the sphere of talent acquisition and retention seem unlikely to reset anytime soon, and are exacerbated by Brexit and the shifting priorities of a younger workforce as the ratio of Generation Z professionals increases and forces employers to reassess their culture and offering.
5. Cryptocurrency set to become an everyday way to pay – despite the digital asset’s woes during 2022, Mastercard recently announced that it is keen to start rolling out plans to make cryptocurrency an “everyday way to pay”, acting as a bridge between Paxos and major banks. This would remove significant hurdles in respect of financing and regulatory compliance, but comes at a time when the FCA is consulting with various government bodies to put in place a regulatory regime for crypto assets given its concerns over the high-risk nature of the asset class. In 2022 the UK Government ran a consultation to gather views on the inclusion of crypto assets in the Investment Transactions List (used by the Investment Manager Exemption). As such, the ITL was expanded in December 2022 to include crypto assets, with the definition of a crypto asset taking the same meaning as that defined by the OECD. This now broadens the scope of investment options available for UK investment managers, and makes crypto increasingly attractive.
6. More onshore Funds – the UK’s attempt to attract Funds onshore came to fruition on 1 April 2022 in the form of the Qualifying Asset Holding Company (QAHC). 2023 sees the first year of compliance for those QAHCs that were first to the dance floor. To recap, these vehicles take the tax neutrality of a traditional UK Holding Company to the next level.