The Government published a Corporate Tax Roadmap setting out the main theme of stability along with areas for consultation, but no significant changes were trailed. Corporation Tax rates are set to remain at the current levels until at least 31 March 2027. The Budget also included a targeted loan to participator anti-avoidance measure and increased relief for UK visual effects.

Summary

Corporation tax rates 

It has been confirmed that the main rate of Corporation Tax will remain at 25% and the small profits rate at 19% until 31 March 2027.  The Corporate Tax Roadmap commits to capping the headline rate of Corporation Tax at 25% for the duration of this Parliament. 

Loans to participators 

A corporation tax charge can arise on loans made by a company to participators that remain unpaid, which is often referred to as a section 455 charge. Anti avoidance rules are already in place to prevent a loan from being repaid and a new loan being made within 30 days, where the intention is to avoid a section 455 charge. 

The targeted anti-avoidance rule has been updated to capture group and associated companies, so that a section 455 charge cannot be avoided by repaying a loan to one entity, then a new loan being made by a related entity. This will cover loans and arrangements made from 30 October 2024. 

Additional tax relief for visual effects 

From 1 January 2025, expenditure incurred in connection with visual effects will qualify for an enhanced rate of audio-visual expenditure credit (AVEC). The rate will increase from 34% to 39%.

The current 80% cap on AVEC qualifying costs is set to be removed for UK visual effects costs.   

These additional credits will only be available to companies once a final certificate has been received from the British Film Institute. The only exception to this is when a project has been abandoned. 

Although the enhanced rate applies to expenditure incurred on or after 1 January 2025, a claim for the visual effects credit cannot be made before 1 April 2025.

Our comment

The certainty provided by the announcement to retain current Corporation Tax rates until 2027, as well as the commitment to cap the headline rate at 25%, will be welcomed by many companies.  

Companies should monitor loans to participators carefully. Good record keeping and diligence is recommended to avoid unexpected charges arising. 

The additional relief for visual effects was announced in the Spring Budget 2024 and is now being implemented following responses to the consultation on the design of the additional relief.  Guidance is expected on the supporting evidence required for the additional relief by 1 April 2025, however companies should ensure that detailed records are kept from 1 January 2025.

There were no significant legislative changes announced for R&D, however businesses should ensure they are adequately prepared for the changes previously announced.

Summary

Two minor legislative changes were announced, both dealing with enhanced relief for R&D intensive SMEs (ERIS). The first is a correction to the previous legislation governing the calculation of the R&D intensity ratio, which will now include expenditure qualifying under both ERIS and the R&D expenditure credit (RDEC). This change will apply retrospectively from the introduction of ERIS (1 April 2023).

The second is an amendment to the ERIS rules in Northern Ireland. Small and medium-sized enterprises (SMEs) in Northern Ireland are not subject to restrictions for overseas R&D activities, however a sector-specific cap applies to the benefit available under ERIS. The draft legislation calculates the ERIS benefit as over and above which would otherwise have been available under RDEC (the additional benefit). This change will apply to claims made on or after 30 October 2024.

The Corporate Tax Roadmap confirmed that the generosity of the rates of R&D relief will be maintained, that the previously announced expert advisory panel and R&D disclosure facility will be implemented and commits to continuing to improve signposting and guidance on R&D reliefs. It also confirmed a consultation will be launched in Spring 2025 on widening the use of advanced clearances for R&D claims.

An update to HMRC’s compliance approach to R&D tax reliefs document was published, including updated statistics on the volume of claims and HMRC’s estimates of non-compliance. The estimate suggests that error and fraud has decreased from 17.6% in 2021-22 to 7.8% in 2023-24.

Our comment

The changes to ERIS, although relatively minor, reflect the speed with which the policy was initially designed and implemented, bypassing a public consultation process. The Chancellor had already publicised the commitment to maintain the generosity of R&D tax relief rates, so no news on R&D tax relief was expected. Longer term stability and a commitment to avoid further rate reductions will be welcome news for many innovative businesses, particularly SMEs. Having weathered several years of reforms to the incentives, the overwhelming call has been for stability and a longer-term outlook when it comes to innovation policy.

The impact of HMRC’s increased scrutiny of R&D claims has been widely debated. While there is broad agreement that additional scrutiny should be welcomed, there have also been concerns that the implementation of a volume compliance approach has led to incorrect decisions and may discourage genuinely innovative businesses from accessing relief. The large number of statutory reviews and alternative dispute resolution requests suggest that many businesses are unhappy with the enquiry process. These do not include any businesses that may have declined to use these often time consuming and costly escalation routes.

The expert advisory panel, R&D disclosure services and consultation on expanding advance assurance are all positive steps, but businesses will be keen to see action taken quickly as these commitments are not new.

With effect from 6 April 2025, the headline rate of employers’ national insurance contributions (NIC) will be increased by 1.2% to 15%.

The secondary threshold will be reduced from £9,100 to £5,000 per employee and the employment allowance will be increased from £5,000 to £10,500 for eligible employers.

Summary

The Chancellor has announced that the headline rate of employers’ NIC will be increased from 13.8% to 15%. The same increase will also apply to Class 1A and Class 1B NIC rates that employers pay on the provision of taxable benefits to employees.

In parallel, the Government will reduce the secondary threshold (the earnings above which employers begin paying employers’ NIC on an employee’s earnings), from £9,100 per employee per year to £5,000 per employee per year.

The Chancellor also announced changes to the employment allowance, which can be used to reduce an employer’s NIC bill. The allowance will be increased from £5,000 to £10,500 per year and, in a move to simplify the system, the existing £100,000 eligibility threshold will be removed, This threshold restricted eligibility for the employment allowance to employers with a total employers’ NIC liability of less than £100,000.

All of the above changes take effect from 6 April 2025.

The Government has estimated that these changes will raise approximately £24 billion per annum over the next five tax years.

Our comment

While the increase in employment allowance softens the impact for small employers, the employers’ NIC changes are likely to represent a significant additional cost for larger employers.

For example, an employer with an annual wage bill of £5,000,000 across 100 employees would currently have an employers’ NIC liability of approximately £564,000. From the start of the 2025/26 tax year when the changes are implemented, employers’ NIC costs in this example will rise to approximately £664,500, an increase of 17.82%.

In light of the increased costs from April 2025, employers who have not yet implemented pension salary exchange should consider doing so as the savings generated will become even more attractive from a tax perspective. Similarly, employers may wish to consider bringing forward the payment of bonuses to employees relating to the FY24 performance year.

Employers will also need to consider the wide-reaching impact of this change, including the cost of employee benefits and engaging with off-payroll workers.

The Chancellor has announced that there will be an immediate increase to the rates of capital gains tax (CGT) with the basic rate rising to 18% and the higher rate to 24%.  

There will also be a staggered increase to the CGT rates for business asset disposal relief (BADR) and investors’ relief (IR), with effect from 6 April 2025.

Summary

The main rates of CGT have been increased for all disposals made on or after 30 October 2024. The tax rates will increase from 10% to 18% at the basic rate and from 20% to 24% at the higher rate. CGT rates applying to disposals of residential property will remain unchanged and are now aligned with the main rates of CGT.  

No changes have been made to the annual exempt amount and taxpayers will still be able to claim relief for capital losses and choose to offset these against capital gains in the most tax efficient way.  

BADR and IR have also been amended. The rate of CGT on disposals of assets eligible for BADR or IR will increase from 10% to 14% from 6 April 2025, with a further increase to 18% from 6 April 2026.  

The lifetime limit for IR has been reduced from £10 million to £1 million for disposals made on or after 30 October 2024. The lifetime limit for BADR remains unchanged at £1 million.

Our comment

An increase to the rate of CGT was widely expected, however there was little consensus as to what the exact rate would be or from when the changes would take effect. With the immediate changes to tax rates, 2024/25 will be a tax year of multiple CGT rates.  

The increase in rates to 18% and 24% aligns the main rates of CGT with the rates for residential property disposals, which should reduce one element of complexity in the system for taxpayers.  

Taxpayers should look to ensure that any available losses are utilised in the most tax efficient manner.