What the chancellor’s autumn budget means for your business and practice
In the chancellor’s autumn budget announcement, the UK government took a step in the right direction by reinvesting in the justice system. But what do the budget’s tax changes mean for solicitors and their businesses?
The biggest revenue-raising tax announcements this year were made in the March budget and September’s announcement of the health and social care levy.
For law firms, the outcome of the economic crime levy consultation was also published last month.
Nonetheless, the autumn budget announced new measures that will affect the legal sector.
Below, we’ve analysed the budget to highlight three changes that impact law firm businesses and three measures relevant to tax, funds, and property practitioners.
The impact on law firm businesses
1. Basis period reform from April 2023
The budget confirmed that the income tax basis period rules are to be reformed.
These rules allocate the profits of unincorporated trading businesses to tax years and apply to a range of taxpayers, from self-employed individuals to large international partnerships (including limited liability partnerships), including many lawyers and law firms.
The transition to the new rules will take place from April 2023, confirming the previously announced one-year deferral.
We are not convinced the case has yet been made for this reform for the reasons set out for HM Revenue and Customs (HMRC) in our August 2021 consultation response.
The changes will create onerous compliance complications for law firms that operate as partnerships within the income tax regime and do not have an accounting date that aligns with the tax year.
Tax liabilities for firms will be accelerated, affecting cash flow and working capital needs.
The government’s summary of impacts for this measure indicates that £1.7 billion in liabilities will be accelerated between 2023 and 2027.
We understand that some changes to the reforms have been made following the summer 2021 consultation.
We’ll be looking closely at the details and practical implications when the amended proposals are published.
2. Business rates review final report published
In that context, the budget announcement that the business rates multiplier will be frozen for an additional year is welcome news.
A one-year grace period before property improvements increase bills has also been introduced.
New measures to support the decarbonisation of commercial buildings and more frequent revaluations (to three-yearly from five-yearly) were also announced, but there is no fundamental re-think of the rates system.
Neither is there any immediate shift from taxing bricks to clicks. Instead, the government will consult on the arguments for and against a UK-wide online sales tax.
3. Extension of the enhanced annual investment allowance
The government will extend the temporary £1 million level of the annual investment allowance to end on 31 March 2023.
The allowance enables a business to claim the full cost of the investment against taxable profits in the year in which it is incurred rather than claiming more gradually over time.
Law firms may wish to consider bringing forward qualifying capital investments.
The impact on the practice of law
1. Notification of uncertain tax treatments by large business
We engaged across two consultation processes with HM Revenue and Customs (HMRC) about its proposals to require large businesses to notify HMRC of “uncertain tax treatments”.
Whilst we do not think the case has been made for this regime from a policy perspective, we have flagged practical issues with the proposed definition of “uncertain tax treatment”.
The government has decided not to include one of the most problematic proposed elements of that definition in the initial rules.
That element would have required taxpayers to notify HMRC where there is a substantial possibility that a tribunal or court would find the taxpayer’s position to be incorrect in material respects.
We raised concerns that this test would be very difficult to apply in practice, so its omission is a helpful development for the practitioners and taxpayers who will have to grapple with the new rules.
2. Capital gains tax property disposal window
From 6 April 2020, the deadlines for reporting and paying capital gains tax due on the sale of UK residential property were significantly tightened to require many returns and payments to be made within 30 days of completion.
An Office of Tax Simplification (OTS) report earlier this year described this deadline as a “very ambitious target” for many taxpayers.
In a welcome development for the property tax system, the government has accepted the OTS’ recommendation to extend the time allowed to 60 days.
The change took effect from Wednesday 27 October 2021.
3. Progress on UK funds reform
We engaged closely with the government’s UK funds review, including:
- the development of the proposed asset holding company regime
- the new regulatory regime for long-term asset funds
- changes to the real estate investment trust rules
It is heartening to see progress with these packages of measures this week, which will support investment and build on the UK’s strength as a leader in the asset management industry.
We also welcome the government’s reiteration of its commitment to the wider ongoing UK funds regime review.
The funds review should continue to seek to provide competitive frameworks to help enable the UK’s asset management sector to reach its full potential as a valued part of our economy.
Ahead of the budget and comprehensive spending review, we recommended that the government use the unique strengths of the legal sector to make levelling up a reality.