January 2023 / United Kingdom

The Autumn 2022 Finance Bill has completed its passage through the House of Commons and the House of Lords and has received Royal Assent. The Bill is now known as the Finance Act 2023.

The legislation covers the following subjects:

• the energy (oil and gas) profits levy, including the rate of tax, the reduction in the amount of additional investment expenditure and the extension of the period for which tax has effect;
• corporation tax relief for expenditure on research and development;
• The income tax basic rate limit and personal allowance for 2026-27 and 2027-28;
• the threshold at which the additional rate of income tax is charged;
• the income tax dividend nil rate;
• the capital gains tax annual exempt amount;
• the inheritance tax rate bands for 2026-27 and 2027-28;
• the removal of the vehicle excise duty exemption for electrically propelled vehicles, etc.; and
• the taxable benefits percentage for cars with a CO2 emissions figure.

Another financial statement, the Budget, is expected in the spring and will be followed by a second Finance Bill.

The United Kingdom's tax authority, His Majesty's Revenue and Customs (HMRC), noted that a new regime for VAT penalties applies from 1 January 2023.

The implementation of the new rules had been postponed from April 2022. Now, for VAT accounting periods starting on or after 1 January 2023, a new points-based penalty system will apply for late returns and payments.

A penalty point will be given for every late return and a GBP 200 penalty will be levied once the penalty points threshold is reached and, again, for every subsequent late submission while at the threshold.

The penalty point threshold is set by the accounting period as follows:

Generally, penalty points will be removed after a 24-month period of compliance.

Penalties will also apply to late payment. A charge of 2% will apply for VAT outstanding after 15 days and again after 30 days. A further penalty will then be applied at a rate of 4% a year from the 31st day until payment is made. Penalties can be avoided by agreeing a time-to-pay arrangement with HMRC.

To allow a period of familiarization with the new system, HMRC will not charge a first late payment penalty until after 31 December 2023 as long as full payment or a time-to-pay arrangement is made within 30 days of the payment due date.

Finally, interest will be charged on the late payment of VAT at the Bank of England base rate plus 2.5%.

The Office of Tax Simplification (OTS) has published its report, "Hybrid and distance working: exploring the tax implications of changing working practices" which, amongst others, notes that improved His Majesty's Revenue and Customs (HMRC) processes, turnaround times, more Pay As You Earn (PAYE) relaxations and better guidance are desired by many stakeholders in the United Kingdom in order to improve tax aspects of hybrid and distance working.

The OTS launched its review in autumn 2022 and asked for evidence from interested parties on the increasing trend for people to work in different ways, including across borders.

The report notes that during the pandemic, about 40% of the UK workforce worked at home for at least part of the week, supported by widely available technology. Many would like to retain this work pattern and employers have recognised this and its importance when recruiting.

The report looks at two aspects which are considered on a domestic and international basis:

• hybrid working where employees spend some of their working time in their employer's workplace and some elsewhere (at home or in a different country); and
• overseas distance or remote working where the employee works permanently in a different country to the business location.

On a domestic basis, the key findings relate to whether the present rules on tax deductions for expenses – such as for traveling and home working - are suitable for the new work environment and whether the rules on taxable benefits in kind require amendment. The report notes: "The pandemic may present an opportunity for government to re-evaluate longstanding rules and arrive at different approaches relevant to modern practices, without necessarily adding to exchequer costs."

The international issues include whether an employee working remotely from abroad might create a taxable presence for the employer in that other country. This is likely to require international agreement, however the UK could take steps to lead by example here.

Social security is also likely to be a complex area since it is not as well covered as tax, meaning an expansion of social security agreements is likely to be required. For those working in the UK for short periods, a policy that a limited time (say 60 days or less) would not result in a UK tax liability might be beneficial.

This is the final report by the OTS which will close when the Finance Bill 2023 receives Royal Assent.