Extension of the increased rate of annual investment allowance

The annual investment allowance (AIA) is a 100% capital allowance that companies and unincorporated businesses can claim in respect of expenditure on eligible plant and machinery.

The rate of £1m expenditure per annum, due to expire on 31 December 2021, is being extended to 31 March 2023.

The intention is that the AIA will then revert to its permanent level; of £200,000 on 1 April 2023, the date when the 130% super deduction available on most main rate pool expenditure is also scheduled to expire.

If the annual rate of AIA does fall back to £200,000 on that date, transitional rules will apply to businesses with a tax period that spans it.

The extension of the enhanced AIA is most likely to benefit unincorporated business and any businesses purchasing assets with an expected life of  at least 25 years or integral features (such as water and electrical systems incorporated into buildings) in 2022 and Q1 of 2023 as the super deduction does not apply to these businesses and types of expenditure.

R&D tax relief reform

Although few details were provided on Budget Day, the Chancellor announced reform of the R&D tax relief regime to take effect from April 2023.

The changes to be introduced include expanding qualifying expenditure to encompass data and cloud computing costs, as well as measures designed to ensure that only R&D activity carried out in the UK is incentivised.

The government had consulted on the design of the R&D tax relief regime earlier this year so it is possible that other changes suggested through the consultation process will also be implemented.

Tonnage tax reform

Tonnage tax is an alternative method of calculating corporation tax profits that qualifying shipping companies can elect to apply for a prescribed period. Under these rules, a set profit is deemed to be earned for tax purposes by each eligible ship operated by the company by reference to the net tonnage of the ship concerned.

At present, a tonnage tax election is in force for 10-years from the beginning of the accounting period in which the election is made. This period is being reduced to eight years.

HMRC will also be given the power to admit elections made outside the normal period allowed where there appears to be a good reason to do so.

Complex flagging rules introduced in 2005 will also be removed. In overview, these rules refer to the national shipping registers that vessels are included on and were introduced to encourage ship operators to register their vessels in EU/EEA member states. This means that eligible companies will now have more freedom to register their ships in other territories and still remain subject to the UK tonnage tax regime.

Finally, rules relating to the taxation of distributions from overseas shipping companies will be amended to remove reference to “control by companies’ resident in EU member states”. As such inter-company distributions are now generally exempt from tax, this change will only have a practical impact in very limited circumstances.

Migration of company residence to the UK

The government is consulting on the introduction of rules which would allow a company incorporated overseas to move its place of incorporation to the UK. This is not possible under existing company law, which means that the UK is behind the curve compared with around 50 countries and jurisdictions around the world.

At the moment, companies and groups need to undertake complex restructuring, such as incorporating a new UK holding company to acquire the shares of the existing overseas company and transferring trades and assets to the UK company as required.

These transactions create additional administration and potentially overseas tax charges on the companies concerned (and potentially UK tax charges on any UK resident shareholders).

The government cites a number of potential economic benefits to making it easier for companies to transfer their place of incorporation to the UK, including increased investment and employment in the UK by the companies themselves and the UK-based businesses servicing them.

Among various other areas, the government is consulting on the tax implications and potential changes of law that would need to be introduced in response to the proposed change in company law. These include:

• determining the tax residence location of companies “re-domiciling” to the UK,
• potential anti-avoidance measures to deal with corporate tax loss importation,
• stamp taxes, and
• VAT issues.

Read more from ICAEW on the business-related announcements in the Autumn Budget 2021.