Budget 2024: An update for business and business owners

Content in this article:

• Capital Gains Tax
• Corporate Tax Roadmap 
• Income tax thresholds
• National Insurance
• Carried Interest
• Enterprise Investment Trust and Venture Capital Trusts 
• Employee Ownership Trusts 
• Business Rates 
• Tax Compliance and Tax Avoidance 
• Growth and Skills Levy 
• National Minimum Wage
• Electric Vehicles 
• Energy Profits Levy
• Non-UK domiciled individuals 
• Umbrella companies 
• Creative Tax Relief

Capital Gains Tax

An increase in the rates of Capital Gains Tax (“CGT”) paid by individuals and trustees was widely expected, given that the Government was silent on it in its election manifesto. CGT is paid on any gain arising on the disposal of capital assets, subject to certain exemptions, such as for your main home, and an annual £3,000 allowance.

The lower rate of CGT has increased from 10% to 18%, and the higher rate of CGT has increased from 20% to 24%. These rates now match the CGT rates for disposals of residential property. The rate increases take effect from Budget Day, and so apply to disposals on or after 30 October 2024. We expect that there are plenty of relieved sellers who completed their sales late on 29 October.

Sellers should note that the Government will introduce anti-forestalling rules that apply to unconditional, but uncompleted contracts, that were entered into before 30 October 2024. To benefit from the "old" rates of CGT, parties to such contracts must prove that:

1. they did not enter into the contract for sale and purchase for the purpose of taking advantage of the rules that deem a disposal to occur when a contract becomes unconditional, rather than at the date of completion; and
2. if the parties are connected, they must be able to demonstrate that contract was entered into for commercial reasons.

There will also be changes to the CGT reliefs of Business Asset Disposal Relief (“BADR”) and Investors' Relief (“IR”). The rates of CGT applicable to both reliefs will increase from 10% to 14% from 6 April 2025, and then to 18% from 6 April 2026. The lifetime limit for IR will also be reduced to £1 million for all qualifying disposals made on or after 30 October 2024, bringing IR in line with BADR.

The increase in rates of CGT is, on the face of it, not as dramatic as expected. Prior to Budget Day, there was speculation that the increases could go as far as equalising the CGT rates with the rates of income tax, i.e. up to 45%.

The Office for Budget Responsibility forecasts that this package of changes will raise an additional £90 million this tax year rising to £2.5 billion per annum by 2029/30 – this is due to the fact that a relatively small proportion of the population (369,000 people in 2022/23) pay CGT. Together with the other major tax rises announced in the Budget, CGT is likely to be viewed a just one of a number of tax rises in the biggest tax-raising Budget since 1993.

The anti-forestalling measures set out above should be considered carefully. Sellers should take advice if they are unsure whether their pre-Budget sale falls within the old CGT rates, and also if they are considering a capital disposal during the remainder of this tax year. DWF can help with this so please do not hesitate to get in touch with your usual contact.

Corporate Tax Roadmap

Alongside the Budget, the Government published a Corporate Tax Roadmap, with the aim of giving businesses more stability and certainty about the Government's tax plans for the Parliamentary term, with a view to encouraging "investment, innovation and growth over the long term". The roadmap focusses mainly on the corporation tax regime, stating that there will be no fundamental or structural change to the regime, and making a number of commitments until the next general election:

• the main rate of corporation tax will be capped at 25%;
• the Government states its intention to engage with the Northern Ireland Executive on devolution of the corporation tax rate to Northern Ireland;
• to maintain the current exemption for gains on disposals of substantial shareholdings and exemption for dividends paid to UK companies;
• to keep the bank surcharge under review to ensure its objectives are appropriately balanced;
• to maintain the current full expensing for capital allowances, the annual investment allowance, writing down allowances and structures and buildings allowance;
• to explore concerns around predevelopment costs and whether these qualify for capital allowances – HMRC will initially discuss with stakeholders and launch a consultation by the end of the year;
• extend full expensing to assets bought for leasing when fiscal conditions allow;
• establish a research and development ("R&D") expert advisory panel and in 2025, consult on widening the use of advance clearances; and
• consult on reforms to UK's rules on transfer pricing, permanent establishments and diverted profits tax in 2025.

Businesses will welcome confirmation of the Government's corporate tax plans, and accompanying reassurance that the rates and regime will largely remain unchanged. There have been problems with the administration of the existing R&D regime, as we have previously highlighted, with particular concern around HMRC's volume compliance checks, which has led to many legitimate claims being rejected and companies being discouraged from claiming the reliefs they are entitled to. In its roadmap, the Government acknowledges these problems and we look forward to seeing more detail in due course on the Government's plans to make the system more efficient.  

Income tax thresholds

The Chancellor has announced that the income tax thresholds for England, Wales and Northern Ireland will be increased in line with inflation from April 2028. The thresholds are currently frozen until April 2028 (a policy announced by the previous Government in the Autumn Statement in 2022). The last increase to the threshold for basic and higher rates of income tax was in April 2021. This commitment will end the practice known as "fiscal drag" from April 2028 whereby the tax receipts are increased by virtue of increasing numbers of people being "dragged" into either paying income tax or paying a higher rate of income tax. The fiscal drag will still be a factor until then.

National Insurance

The Chancellor has announced an increase in the rate for employer National Insurance contributions ("NICs") and a reduction in the salary threshold for when employer NICs become payable.

The rate will be increased from 13.8% to 15% and the salary threshold for when employer NICs will be payable will be reduced from £9,100 to £5,000 a year.

This increased liability for employers has been mitigated somewhat by the increase in Employment Allowance which currently allows employers with employer NICs bills of £100,000 or less to deduct £5,000 from their employer NICs bill. The changes abolish the upper limit of £100,000 and therefore will allow all eligible employers to deduct an increased amount of £10,500 from their annual employer NICs liability.

The changes will take effect from 6 April 2025.

These changes shift the immediate burden of the tax increases to employers but research shows that the cost of such a burden is likely to be passed onto employees in the long-term through lower pay increases and other cost-saving measures for businesses. This is acknowledged in the Budget which confirms that "the OBR expects part of the additional costs from the employer NICs rise to be passed through to lower real wages, which would reduce the supply of labour, and partly through to  lower profits."

The employer NICs increase is a neat way of indirectly taxing employees without it being immediately obvious from looking at a payslip. Whether or not this will be characterised as a breach of the Labour Party's manifesto commitment to not increase National Insurance is likely be a political battle over the coming days.

Carried Interest

The Labour Party manifesto promised to cease taxing carried interest as capital. At Budget, it made good on this promise, but appears to be falling short of imposing full income tax rates on carry. This will offer at least a limited comfort to the investment management industry. Although, detail is lacking, it looks like carry will instead be taxed in the longer term at 32.6% (or 34.6% if subject to NI, which is unclear). No exemptions have been offered, such as a much speculated upon co-investment safe harbour, but as full implementation is delayed to April 2026, there is potentially still scope for this to change.

As an interim measure, the current regime will continue to apply until April 2026 with rates of capital gains tax increased to 32% from April 2025. From April 2026 carry will be taxed within the "income tax framework, with a 72.5% multiplier applied to qualifying carried interest". There is much here that is unclear, not least what will constitute "qualifying carried interest" or how this will interact with the NI regime. Taken at face value this would give an effective rate of 32.625% (72.5% of the additional rate of 45% and ignoring NI).

To what extent the investment community is able or willing to absorb this rate increase remains to be seen. There had been widespread fears that this change (together with the changes to non-UK domiciled individuals rules also announced today) would see an exodus of PE houses from London. A comparatively modest 4% rise may be low enough to prevent this but this will remain to be seen.

In the meantime, it will be essential for those in the industry to keep an eye on detailed legislative proposals as these become available. The definition of qualifying carried interest is likely to be key, as investment managers may be able restructure either their funds or their portfolios either to fall inside or outside this definition (depending on which turns out to be more beneficial) in advance of the changes.

Legal advice will be key to any such structuring, so please contact the DWF tax team to discuss further.

Enterprise Investment Trust and Venture Capital Trusts

The Government confirmed that the Enterprise Investment Scheme (“EIS”) and Venture Capital Trust (“VCT”) schemes will be extended to 2035.

Initially introduced in 1994 and 1995 respectively, this will mean that the reliefs available to individuals and venture capital trusts will have been available for forty years, facilitating access to external sources of finance for small, young businesses.  

We wrote about the extension to the VCT scheme in early October 2024, and you can find out more about the scheme's qualifying conditions and incentives in our article here.

Employee Ownership Trusts

As part of the Budget 2024, the Government has announced a number of changes to employee ownership trusts (EOTs). These changes follow a consultation on EOTs that took place between July and September 2023, which DWF took part in.  A number of the changes announced at Budget Day were expected, as they follow the outcome of that consultation, but there are some key points to be aware of.

EOTs were originally introduced by the coalition government in 2014 to encourage wider employee ownership.  EOTs provide capital gains tax (CGT) relief for owners of companies selling the shares of their trading company into a trust set up for the benefit of the company's employees.  A number of requirements must be met for the relief to be available.  (It is worth noting the relief is a relief for the sellers, but is really a deferral of tax as any gain will ultimately come into charge on the trustees if the EOT sells the business in the future.)

We have advised company owners, trustees and third party funders on EOTs structures and we have seen them grow in popularity after a relatively slow start.

The consultation in 2023 sought to make some changes to the EOT rules to ensure that the legislation operated as the Government had intended.

The majority of the changes were anticipated but there were a few surprises. While we do not have the draft legislation yet, the announcements set out the following changes.

• Former owners of the company (or persons connected with them) are restricted from retaining control of the company after a sale to an EOT, by controlling the EOT itself.
• The trustees of the EOT, must be UK resident at the time of disposal to the EOT. This is to ensure that the EOT relief acts as deferral of tax rather than an exemption by allowing non-UK resident trustees to realise a gain by selling the shares in the company, which would have escaped UK CGT.
• Finally, there has been some doubt as to how contributions to the EOT from the company should be treated for tax purposes, as this is not dealt with in the legislation. It was therefore routine for EOTs to obtain a non-statutory clearance from HMRC that the contributions would not be taxed in the hands of the trustees.  The response from the Government confirms that these contributions will be treated as distributions, but they will be tax free if the contribution is to repay the sellers for the shares in the company and meet the costs of acquiring the shares (including stamp duty and reasonable interest on deferred consideration).

These three changes were largely expected.

In addition, a number of other changes were made that were contemplated by the consultation but were less widely considered.

• Employees of companies owned by EOTs can receive a "bonus" of up to £3,600 each year that is tax free (but not free of national insurance). This bonus must be paid to all staff on the same terms (with some limited exclusions).  The changes from today will allow bonuses to be awarded to employees but not to directors.  This provides some flexibility and may allow the bonuses to be paid to the less well remunerated staff rather than to the directors of the company.

Before 30 October 2024, CGT relief that sellers enjoy will be withdrawn if the company fails to meet the qualifying conditions for EOT before the end of the tax year following the tax year in which the disposal occurs.  This withdrawal is now extended if the conditions are not met before the end of the fourth tax year following the tax year of disposal.

This is quite a significant change and one that could potentially cause problems.  If the seller does not control the business after the sale, which it cannot, and now under the changes announced today it cannot control the EOT; how does the seller ensure that the company continues to meet the necessary conditions and does not trigger a claw back of the seller's CGT relief? This is already a problem for sellers but the problem is now more of an issue as the period is extended significantly

The way in which this is typically dealt with is that the most sellers require the trustees of the EOT to provide an indemnity to them to cover the CGT if the EOT CGT relief is withdrawn as a result of failing these conditions.  This will become more important for sellers, and potentially more onerous for trustees, who may suffer a "dry" tax charge.

• The new legislation will also require that the trustees must take "reasonable steps" to ensure that the consideration paid to acquire the company's shares does not exceed the market value of those shares. It is not clear what steps these may be or what HMRC will consider is "reasonable", but trustees should now have any valuation reports addressed to them as well as the sellers. If the trustees do not take reasonable steps then the disposal may not qualify for relief and the trustees may be taxed on the distributions from company.

We think that this is probably a sensible change as EOTs are intended to allow the business to flourish for the long term under employee ownership and EOT relief is not intended to weigh down a company with long term debt.  Valuation is obviously a crucial consideration when any part of the consideration is funded by third party debt secured on the EOT assets and the company.  It should also probably be welcomed by sellers who genuinely want to pass the benefit of the business to its employees and who have technically run the risk of an employment related securities charge if the company's shares were sold to an EOT for more than market value.

• Finally, in an administrative change to the rules, that is effectively retrospective, for the 2024/25 tax year onwards, sellers of shares to EOTs must include details of the consideration they have received for the shares and the number of employees of the company at the date of disposal when making a claim for EOT CGT relief in their self-assessment tax return. This is intended to allow the HMRC to, "better monitor and evaluate the relief".  This will affect anyone who sold their shares to an EOT since 6 April 2024.

Business Rates

The Labour Party manifesto promised business rates reform in England. The Government has launched a discussion paper for future reform as well as making some more immediate changes to business rates in England aimed at supporting small businesses and the high street. One key measure is the permanent reduction of business rates multipliers for retail, hospitality, and leisure ("RHL") properties starting from 2026-27. This change is intended to provide long-term relief to these sectors, which have been particularly hard-hit in recent years. However, it will only apply to RHL properties with a rateable value under £500,000.

Additionally, for the tax year 2025-26, the small business multiplier (for those with rateable values less than £51,000) will be frozen, and RHL businesses will receive a 40% relief on their bills, up to a £110,000 cash cap per business. In the consumer sector, particularly for retail and hospitality businesses, the extension of the relief in England (albeit not as generous as in previous years) will be welcome.

Whilst these interim measures are good news for many in the RHL sector, the Government has announced that it will fund these cuts by introducing a higher multiplier on properties with rateable values of £500,000 and above. This change will disproportionately impact those with significant commercial real estate holdings. The Government highlights that this change will be a way of taxing online giants and their large distribution warehouses. However, there is pressure on the Government to go further and impose specific business rates on warehouses and fulfilment centres used by online retailers, regardless of their rateable value.

For those working in the Government & Public Sector, the Government has committed to ensuring that, as far as practicably possible, local government income is unaffected by business rates tax policy changes and that local government is compensated for administration costs. The promise to compensate local governments for administration costs is positive, but local governments rely heavily on business rates as a source of income, so the effectiveness of this compensation depends on how well it is implemented.

Alongside the Budget, the Government has published a discussion paper, Transforming Business Rates. The Government set out that it will consider any future reform against its objectives of: protecting the high street; encouraging investment; and creating a fairer system. Priority areas for reform include the relationship between making improvements to a property and an increase in rateable value, empty property relief and making the system more responsive. The Government will be engaging with stakeholders between November 2024 and March 2025. Initial expressions of interest are invited by 15 November 2024.  

Overall, while the Government’s efforts are welcomed by many who want to see the system reformed to reflect the modern economy, the delivery of a fairer system for business rates will not be determined by the immediate reforms announced in this Autumn Budget 2024. Instead, it will depend on the changes the Government has committed to consulting on over the term of this Parliament.

Tax Compliance and Tax Avoidance

As with its predecessors, the Government intends to increase revenue by focussing on increasing tax compliance, reducing tax debts and combatting fraud and tax avoidance. In support of this, it has confirmed a number of measures including:

• HMRC Staff and debt collection – As announced in July 2024, over the next five years, it will invest £1.4 billion to recruit 5,000 additional HMRC compliance staff and £262 million to fund 1,800 HMRC debt management staff. It also intends to invest £154 million to modernise HMRC's debt management case system and a further £12 million on acquiring credit reference agency data to enable better debt collection activities.
• Tax Advisers – The Government will invest £36 million to modernise HMRC's tax adviser regulation services and will mandate registration of tax advisers interacting with HMRC from April 2026. They intend to consult in early 2025 on HMRC's powers to take swifter and stronger action against advisers who facilitate non-compliance.
• Tax Liabilities – The Government will increase the late payment interest rate charged by HMRC on unpaid tax liabilities by 1.5% with effect from 6 April 2025.
• Tax Avoidance and Fraud - The Government will increase collaboration between HMRC, Companies House and the Insolvency Service to tackle contrived corporate insolvencies used to avoid tax. It will also expand HMRC's counter-fraud capabilities to address high-value fraud and strengthen HMRC's scheme for rewarding informants to encourage reporting of high value tax fraud and avoidance. In addition, the Government will publish a consultation in early 2025 to tackle promoters of marketed tax avoidance. Additional resources will also be committed to tackling off-shore non-compliance including serious non-compliance and fraud.

Growth and Skills Levy

The Government previously confirmed its commitment to replacing the existing Apprenticeship Levy with a new Growth and Skills Levy. The Budget pledges £40 million of investment to facilitate this change and encourage shorter apprenticeships in key sectors. Skills England are currently consulting to ensure the scheme meets the needs of employers, providers and learners.

Businesses should monitor this closely and ensure they understand the new levy and how it will affect their operations in the near future.

National Minimum Wage

The Government announced on 29 October 2024 that it will accept the recommendations of the Low Pay Commission to increase the National Minimum Wage ("NMW"), including the National Living Wage ("NLW"). The new rates to apply from 1 April 2025 will be as follows:

The changes to the NMW rates form part of the Government's aim to work towards a single adult rate for all workers. The NLW changes are expected to affect more than three million workers and are part of the Government's plan to boost workers' rights.

Whilst many workers and young people will welcome this change some businesses are concerned that higher operational costs will result in decreased profits or higher prices for customers. The Government has suggested that this change will boost productivity but many businesses fear that this change together with the changes to workers' rights and additional employer national insurance contributions will result in increased prices or lower profits and reductions in the workforce or pay freezes for the remaining workforce.

There are concerns from the Confederation of British Industry that these changes will make it increasingly difficult for businesses, especially small and medium sized enterprises, to invest in tech and innovation needed to boost productivity.

There is particular concern being expressed by the UK hospitality and retail industries, which already face talent attraction and retention issues, citing threats to jobs and future investment, price increases for consumers and business viability.

Some of these issues may be addressed by the Government's commitment to delivering a fairer business rates system through permanently lowering business rates multipliers for retail, hospitality and leisure properties in England and Wales but the industries are still concerned about the NMW and NLW changes. The public sector has also expressed concern since the increased NLW is higher than the minimum wage paid to many public sector staff and may lead to staff leaving public sector jobs which can struggle to attract talent.

Electric Vehicles

The Chancellor has announced a number of measures to encourage the adoption of electric vehicles ("EVs"):

1. Tax Incentives: The government will continue company car tax incentives for EVs beyond 2028, maintaining lower tax rates for zero-emission vehicles.
2. Vehicle Excise Duty: The differential between electric and combustion engine vehicles will increase, making EVs more financially attractive compared to petrol and diesel cars.
3. Public Charging Infrastructure: Significant investments will be made to expand and improve public charging infrastructure, making it easier for EV owners to charge their vehicles and encourage people to change to EVs.
4. Green First Year Capital Allowances: qualifying expenditure on zero-emission cars and the 100% first year allowance for qualifying expenditure on plant and machinery for EV chargepoints by business have been extended to 31 March 2026 for corporation tax purposes/5 April 2026 for income tax purposes.

These measures aim to boost EV sales and support the transition to net zero.

Energy Profits Levy

The Chancellor has incorporated in to draft legislation the pledges made in the Labour Manifesto in relation to the Energy Profits Levy ("EPL"). Starting from 1 November 2024, the EPL will increase by 3% to 38%. Additionally, the levy has been extended by 12 months, now ending in March 2030.

The EPL, introduced in May 2022, taxes certain profits of oil and gas companies operating in the UK or its continental shelf. This measure was originally in response to soaring oil and gas prices and the resulting profit surge following disruptive global events. The EPL aims to address the perceived unfairness of energy companies profiting during the UK’s cost of living crisis.

In addition to the Ring Fence Corporation Tax (30%) and the Supplementary Charge (10%), the EPL rate uplift will increase the total headline tax rate on upstream oil and gas activities to 78%.

The Government did not announce any change to the Energy Security Investment Mechanism ("ESIM"), which enables the Energy Profits Levy to cease if the six month average price for both oil and gas is at or below threshold prices. Therefore, the current EISM rules remain in place.

The EPL currently has two investment allowances. However, the Government has announced that the 29% Investment Allowance will be abolished. In addition, there will also be a reduction to the rate of the Decarbonisation Investment Allowance ("DIA") from 80% to 66%. The DIA applies to qualifying expenditure on decarbonising upstream oil and gas production, such as capital expenses on non-fossil fuel power sources and reducing greenhouse gas emissions. The DIA aims to support the sector’s transition to net zero by 2050. The Government describes how these measures aim to support the transition to clean energy, improve energy security, and provide sustainable jobs while protecting energy bills against future price shocks.

There may be a concern that an increasingly higher tax rate could lead to a sharp drop in investments by oil and gas but others would argue that the EPL, and the DIA, supports this shift by incentivising investments in decarbonisation.

Non-UK domiciled individuals

The Government is moving ahead from 6 April 2025 with its existing plans (inherited from the previous Government) to abolish the existing "non-dom" tax regime for those tax resident in the UK, but domiciled abroad.

We have discussed these proposals in more detail here and the new "Foreign Income and Gains" ("FIG") regime, according to the recent Budget, will mostly be introduced as expected.

As expected, the Government intends to build on the previous Governments proposals by scrapping the "soft landing" of the 50% reduction in foreign income subject to tax in the tax year 2025 to 2026.

The new regime will only apply to income and gains arising after 6 April 2025. Former remittance basis users will still be subject to UK tax on non-UK income and gains arising before then and remitted to the UK.  The government is seeking to drive a significant repatriation of wealth into the UK by applying this as a reduced rate of 12% for the next two years and 15% for the year after that.

Further, and potentially more materially for many existing non-doms, the Government is moving ahead with its plan to replace the existing non-dom inheritance tax system with a residency based system. Individuals will be subject to UK inheritance tax on all assets (UK and non-UK) if they are tax resident in the UK for at least ten out of 20 years prior to death. From 6 April 2025, the Government also intends to remove the inheritance tax exemption for certain non-UK property settled in trust while the settlor was a non-domicile. This could make some existing trust arrangements ineffective.

These changes amount to a fundamental change to how the UK's residency rules work for individuals and will have a large impact. It will simply no longer be possible to live in the UK long term and accrue large untaxed gains offshore. It remains to be seen whether the temporary repatriation facility will drive wealth into or out of the United Kingdom on a net basis.

The Government's proposals are complex and detailed and more complexity can be expected once draft legislation is introduced. Anyone currently living or intending to live in the UK who is not already domiciled here, should take detailed advice on their tax affairs and the DWF tax team is well placed to assist.

Umbrella companies

There has long been a concern that so-called umbrella companies are both a vehicle for tax avoidance and can negatively impact on workers’ rights. The previous Government had already launched a consultation this issue. The Budget approaches the issue head on and effectively negates most of the tax advantages of using umbrellas.

Umbrellas are employment intermediaries who act as employers on behalf of recruitment agencies and end clients. Umbrellas are generally also responsible for operating PAYE. HMRC's view is that although many umbrellas are properly operated there is also considerable error, avoidance and fraud.

The changes announced at the Budget will shift the obligation to operate PAYE to the agency or end client from April 2026. Although this is a different regime to the off-payroll worker rules (often called IR35), it is likely to operate in a similar way. The current rules effectively insulate agencies and end clients from PAYE risk involving umbrellas. That insulation will no longer exist and agencies and end clients will need to take greater responsibility for how umbrellas operate.

This is likely to have a significant impact on the attractiveness of the umbrella company model and may even mean the end of the industry. Anyone employed by or engaging with (directly or indirectly) an umbrella company is likely to be affected. There is more than a year until these changes take effect and anyone impacted would be well advised to review their current employment arrangements and take any remedial action required well in advance.

Creative Tax Relief

In the Autumn Budget 2024, the Government committed to an estimated £15 billion in tax reliefs for the UK’s creative industries over the next five years. The current Government will retain these measures and it has committed to upholding those measures that have already been legislated.

Starting from 1 April 2025, an enhanced audio-visual expenditure credit will be available for UK independent films at a rate of 53% of qualifying film production expenditure. This credit is designed to incentivise film industry output on qualifying projects with budgets under £15 million.

In addition, the tax relief for visual effects costs in film and TV will increase to 39% (up from 34%), and the cap on qualifying expenditure for visual effects costs will be removed entirely.

Other measures for the creative industries include making tax reliefs for theatres, orchestras, museums, and galleries permanent at 45% for touring and orchestral productions and 40% for non-touring productions. These rates were due to reduce to between 20% and 25% by 2026 but will instead be maintained at these higher rates.

If you would like to discuss any of the measures announced in the Autumn Budget, please contact one of our UK Tax team: