The first major fiscal statement by the new Government has set the tone for the future, with a package of measures intended to drive growth, productivity and to encourage investment in the UK, both domestically and from overseas, and to ‘unleash the power of the private sector’. The Growth Plan sets an ambitious target for annual economic growth of 2.5 per cent and is supported by a range of cuts to both direct and indirect taxes, support for individuals and businesses to tackle increasing energy costs, and measures to encourage and reward investment.
Whilst the measures promise lower tax costs for businesses and less red tape, it remains to be seen whether they will have the desired effect, as certainty that these measures will be in place for the long-term may be required for investment into the UK to be maximised.
- Corporate tax
- Private client
- Venture capital reliefs
- VAT and indirect tax
- Employment tax
- Stamp duty land tax
- The economist view
As promised in Liz Truss’s leadership campaign, the planned corporation tax rate increase from 19 per cent to 25 per cent, due to take effect from 1 April 2023, has been scrapped. The headline UK rate will therefore remain at 19 per cent, one of the lowest rates in the G20 (and the lowest in the G7). The Government’s projections suggest this reversal will save businesses just under £19bn per annum by 2026-27. Of course, the other side of this equation is that the UK tax take will reduce by £19bn in that year, with the Government clearly hoping that the policy stimulates sufficient economic growth to generate additional receipts to offset this shortfall.
In March this year, the former Chancellor Rishi Sunak set out his tax plan. One area of concern highlighted by Mr Sunak was the long-standing issue with productivity in the UK, with one of the key underlying causes being a lack of capital investment. In the UK, businesses reinvest just 10 per cent of GDP each year, with 14 per cent typical in comparable countries. Mr Sunak therefore suggested that the UK needed to find the most effective way to cut taxes on investment while ensuring value for the taxpayer.
Today, the new Chancellor Kwasi Kwarteng has announced a change to the annual investment allowance, which provides for 100 per cent tax relief on capital investment in qualifying plant and machinery up to a set expenditure limit. The limit was scheduled to reduce from £1m to £200,000 on 1 April 2023, but the Chancellor has confirmed that it will remain at £1m permanently. This £1m limit has applied since 2019, and since 2021 the so-called super-deduction, which ends on 31 March 2023, has provided an even more generous incentive for capital expenditure, yet capital investment in the UK continues to lag behind comparable countries. Whilst the announcement was expected, could the Government have been more radical and gone further to encourage business investment, such as by extending the super-deduction period beyond 31 March 2023?
The Government has also provided more details on the tax reliefs that will apply in the investment zones it has announced that it will be setting up. In addition to streamlined planning processes for developments, the Government will: subsidise 100 per cent relief from business rates; apply a zero rate of stamp duty land tax (SDLT) on land bought for commercial or residential development; provide relief from employer’s National Insurance contributions (NICs) on the first £50,270 earned by new employees working in the investment zone for at least 60 per cent of their working time; legislate for an uncapped 100 per cent first year allowance for plant and machinery used in the investment zone; and, provide an enhanced 20 per cent per year allowance for structures and buildings (the general rate is 3 per cent). The location of the investment zones is still to be confirmed, but the Government is in discussions with 38 local authorities in England and will work closely with the devolved administrations and local partners in Scotland, Wales and Northern Ireland to deliver similar opportunities.
These announcements were expected, and some will wonder if the Government could have been more radical and gone further to encourage business investment.
Ultimately, except as regards investment zones, there is no change in the status quo for UK corporation tax. Whilst this means that it is hard to argue that the corporation tax measures are radical in themselves, the continued low tax environment for businesses, coupled with the changes to income tax and the removal of the cap on bankers’ bonuses, are policies designed to attract big business to the UK. Nevertheless, given the recent political uncertainty and with a general election due within two years, time will tell whether they do enough to encourage big businesses to relocate to the UK in the short term.
The biggest headline in today’s mini-Budget has been the unexpected abolition of the additional rate of income tax from April 2023. This will apply to an estimated 629,000 individuals in the UK with incomes in excess of £150,000. In addition, the Health and Social Care Levy (and transitional temporary increase in NICs rates prior to its introduction) has been scrapped, and the previously planned 1p cut in the basic rate of income tax has been accelerated to take effect from April 2023. All income tax payers will have a lower tax burden, but the big winners in today’s announcements will be the projected 1.9 per cent of high earning taxpayers currently paying tax at the additional rate.
The Chancellor has been clear that this is part of a plan by the Government to make the UK more attractive for capital investment and to higher earners internationally, as its highest income tax rates will be amongst the lowest across Europe and the G7 going forward. The removal of the cap on bankers’ bonuses means that top financiers can both earn more, and pay tax on those earnings at a lower rate.
The announcement of a significant reduction in the income tax rate next year for those most able to control the timing of their income is likely to mean the deferral of bonuses and dividends into the next tax year. The tax take for the current 2022/23 tax year is therefore likely to be lower than it would otherwise have been. Big announcements in previous Budgets have included an element of anti-forestalling rules to ensure that taxpayer behaviour isn’t influenced by upcoming legislation. That doesn’t appear to be the case in this announcement and the Treasury appears to be expecting income tax receipts to drop in the current financial year.
A potentially unintended consequence is that potentially significant differences are starting to emerge between England and Northern Ireland and the rest of the UK. Both Scotland and Wales have devolved powers to set their own income tax rates on earned, pension and property income, with Welsh rates yet to diverge from the UK rates and the differences between Scottish and UK rates being relatively modest. In the year to 31 March 2022, statistics show that there were 20,000 taxpayers in Scotland and 6,000 in Wales paying tax at the highest marginal rates. On average, these taxpayers each paid £142,045 income tax in the year to 31 March 2022. Based on this, the income tax measures announced today could encourage higher earners to consider moving their tax residency and put significant devolved tax revenues at risk - it remains to be seen how the Scottish and Welsh governments will react.
Venture capital reliefs
Alongside the reduction in taxation on companies and individuals, the Government has identified investment into private businesses as a key area to fuel growth of the UK economy. The seed enterprise investment scheme (SEIS) has been extended from April 2023. Companies will now be able to access £250,000 of SEIS investment, a two-thirds increase on the previous limit, and the restrictions on gross assets and age of the company will be relaxed to enable more companies to access such funding.
The positive news also extends for individual investors as the maximum amount that can be invested will be doubled to £200,000. Those investing the maximum amount can see their income tax bill reduced by up to £100,000. In addition, capital gains tax relief of up to half the value invested can also be claimed.
Whilst no changes were made to the enterprise investment scheme (EIS) and venture capital trust (VCT) rules, it appears that they will also form the backbone of encouraging private sector investment as there was comment to potentially extending them in future.
VAT and indirect tax
Contrary to pre-mini-Budget rumours, there have been no cuts to the standard rate of VAT or VAT on fuel and power. Instead, the Chancellor has limited his indirect tax announcements to the reintroduction of VAT-free shopping for overseas visitors and a forthcoming reform of the alcohol duty regime.
The Government proposes a new digital VAT-free shopping scheme for non-UK visitors to Great Britain (GB), which will enable them to obtain a VAT refund on goods bought from retailers (including those at airports and other ports) that are subsequently exported. In addition, the scheme that operates in Northern Ireland which allows VAT refunds for visitors from non-EU countries (with the exception of GB) will also be modernised. We expect that these changes will be introduced in 2023 or later, following a consultation with the relevant stakeholders. This announcement was a something of a surprise as the very similar ‘retail export scheme’ was scrapped on 1 January 2021 when the UK left the EU’s VAT and customs systems. Many GB retailers, particularly those that sell luxury brands popular with wealthy tourists, reacted angrily to the removal of the previous scheme, even taking the Government to court when their objections were ignored. Whilst the promised reinstatement of this relief would be a boost for the high street and for the travel and tourism sectors, sector operators will be frustrated that no clear date has yet been set for its reintroduction. There is also some scepticism about the suggestion that this scheme will be digital in nature, the Government having first announced this proposed reform in 2013 and scrapped similar plans following further consultation as recently as 2020.
The Government has stepped closer to finalising its plans for alcohol duty reform, which it intends to bring into force on 1 August 2023. The latest consultation document confirms that the number of different alcohol categories for excise duty purposes will be reduced, and products will be taxed in direct proportion to their strength, with the rates of tax rising according to the alcohol content by volume (ABV). The existing separate registrations and approvals systems for different types of alcohol will be consolidated into a single monthly alcohol duty return and a single approval process, which will be administered online. The overall simplification of the duty system has received a warm welcome from the industry as a whole, but the latest consultation highlights some concerns raised by cider makers, that are likely to pay more tax under the proposals. HMRC and the Treasury have now published the draft legislation for technical consultation with stakeholders, and will continue to consult on some final details. Alcohol producers should review the impact of these changes on their business ahead of the introduction of the new regime next year.
National Insurance contributions and the Health and Social Care Levy
The Government is reversing the temporary 1.25 per cent increase, in Class 1 NICs introduced in April 2022, with effect from 6 November, and cancelling the Health and Social Care Levy that was due to take its place as a separate tax from April 2023.
This change will be challenging for employers and those updating payroll software to reflect before it takes effect, given the requirement to file RTI returns ‘on or before’ the date an employee is paid, and the need for most employers to run their payroll ahead of pay day.
The HMRC release announcing this measure suggests that most employees will receive a cut to their NICs directly via payroll in their November pay, albeit with some receiving it in December or January, depending on the complexity of their employer’s payroll software.
The resulting NICs rate for Class 1A (on P11D benefits) and Class 1B (on PAYE settlement arrangements) for 2022/23 will be 14.53 per cent and directors' annual earnings NICs rates are also blended for 2022/23 being: 12.73 per cent for employee contributions on income between the lower and upper earnings limits; 2.73 per cent for employee contributions above the upper earnings limit; and 14.53 per cent on employer contributions.
In a significant change following concerns raised, the Government has announced a repeal of the off-payroll working administrative rules introduced for the public sector from April 2017 and extended to medium-sized and large private sector businesses from April 2021.
This will reduce the burden on engagers that currently requires them to undertake status assessments, issue status determination statements and, where necessary, add contractors hired via intermediaries that do not meet the test to be treated as self-employed to payrolls for deduction of tax and NICs under PAYE.
From 6 April 2023, workers providing their services via an intermediary will once again be responsible for determining their own employment status and accounting for tax under the original IR35 rules to HMRC, putting the burden back on HMRC to check compliance with the IR35 rules.
Once further details are known, affected engagers and contractors should consider their off-payroll hiring and working models and plan for the change in April 2023.
Company share option plans
Company share option plans (CSOPs) are tax advantaged share incentives that allow companies to grant tax efficient share options to employees selected at the employer’s discretion. A number of key conditions apply; however, from April 2023, qualifying companies will be able to issue up to £60,000 of CSOP options to employees, double the current £30,000 limit.
In addition, the rule that restricts companies whose shares are eligible for CSOP incentives to those with share classes that are ‘worth having’ will be eased, better aligning the CSOP rules with the rules in the EMI scheme and widening access to CSOP for growth companies.
Stamp duty land tax
The Government has reduced the SDLT payable by people buying a home in England and Northern Ireland. The threshold above which SDLT must be paid on the purchase of such residential properties has increased from £125,000 to £250,000, which should provide a maximum saving of up to £2,500. The increase in the thresholds may be of particular interest to landlords with larger residential property portfolios who may have been debating whether to transfer their portfolio from personal ownership into a company. SDLT often represents a barrier to such structuring but the impact of this may now be reduced for many. If the average value of the residential dwellings in their portfolio is £250,000 or less, the applicable rate of SDLT may potentially be capped at 3 per cent if relief is available and claimed.
Based on last year’s statistics, at least 64 per cent of all residential property transactions would have fallen out of SDLT altogether, excluding first-time buyers’ relief. It is notable that this change benefits all purchasers – landlords, those purchasing second homes, and owner-occupiers alike.
The Government has also increased the relief for first-time buyers. The threshold at which first-time buyers begin to pay SDLT on residential property will increase from £300,000 to £425,000, and the maximum value of a property on which first-time buyers’ relief can be claimed will also increase, from £500,000 to £625,000. This will deliver a maximum saving of £11,250.
These changes, which take effect today, will be welcomed by many that wish to purchase a home in England and Northern Ireland. It will be interesting to see whether they prompt to the governments of Scotland and Wales to review the rates and reliefs applicable under their own devolved property transaction taxes. The measures help to reverse the trend of taxpayers being dragged into the SDLT net as a result of spiralling property prices and fiscal drag - prior to the announcement, SDLT receipts looked set to comfortably exceed £16bn for the current financial year, when they were less than £12bn in the last full year before the coronavirus pandemic. The danger for taxpayers is that this tax cut fuels future property price increases – it’s possible that this may actually result in more SDLT being due overall.
The economist view
Treasury and BoE pulling in opposite directions
The new Chancellor’s 'mini-Budget' turned out to be more like the full fat version. Admittedly, the tax cuts announced today will give a boost to the economy of roughly 1 per cent over the next year compared to under the previous fiscal plans. That reduces the risk of a protracted recession over the winter. However, they will also boost inflation by almost as much in the medium term and will almost certainly result in higher interest rates. We now expect interest rates to peak at closer to 4 per cent than the 3 per cent we previously envisioned.
What’s more, by financing these tax cuts through additional borrowing, the UK public finances are looking increasingly unsustainable. Public borrowing now looks set to surge to over 9 per cent of GDP in 2022/23 and the debt-to-GDP ratio is likely to be on an upward path. This raises the risks of damaging cuts to spending in later years or an even larger fall in the pound.
Finally, there was nothing in the Budget that makes us more optimistic about the long-term growth trend of the economy. Trend growth is currently probably half of the 2.5 per cent the Chancellor has set as his new target. It will take significantly more than tax cuts to get the UK economy going at that speed.
Lower taxes and higher spending
The new Chancellor of the Exchequer, Kwasi Kwarteng, took a chainsaw to the UK’s tax take today, announcing cuts in income taxes, corporation taxes and stamp duty, among others. All this adds up to a loosening in fiscal policy of about £45bn, a little bigger than was expected.
The Chancellor also set out his growth target of 2.5 per cent a year.
There are two big impacts for the economy. First, there will be a short-term boost to growth. Taken together with the energy price cap, GDP growth in 2023 will be about 1.5 per cent stronger than if the government hadn’t taken any action. So even though the UK is probably already in a recession due to the extra bank holiday for the Queen’s funeral, the chances of a protracted recession over the next year have fallen sharply.
There was also a nod to some supply side reform, with aims to implement some much needed reforms of the planning system and setting up investment zones with preferential tax treatment and cuts to corporation tax.
However, reforming the planning system has been the aim of many governments over recent years, though much more difficult to do in practice. Indeed, previous cuts in corporation tax, which fell from 28 per cent to 20 per cent in 2015 (and 19 per cent subsequently), lifted business investment, but not by nearly as much as expected.
Investment zones are similar in principle to the 'enterprise zones' announced by then-Chancellor George Osborne. The evidence, both domestically and internationally, is that special economic zones don’t result in a material step change in economic performance. A more reasonable assumption is that they will displace activity from elsewhere, rather than significantly boost overall GDP.
And most of the policies announced today focused on boosting demand. As such, we doubt that this Budget has done much to lift the UK’s trend rate of growth, which is currently hovering somewhere around 1.5 per cent per year.
The second impact is that a massive fiscal stimulus is coming at a time when the labour market is exceptionally tight, and that will lead to higher inflation in the medium term. This will cause the Bank of England to raise interest rates by even more. We expect rates to reach between 3.5 per cent and 4 per cent by early next year, but financial markets are pricing in a return to 5 per cent.
Public finances looking unsustainable
The Chancellor has taken a big bet that his tax cuts will spur growth. But in the short term, at least, as the fiscal expansion is not fully funded by tax rises or spending cuts elsewhere, borrowing will surge.
All the way back in March, the independent Office for Budget Responsibility (OBR) predicted that borrowing would fall from £133.7bn (5.6 per cent of GDP) in 2022, to just £36.5bn by 2025 (1.3 per cent of GDP). That downward trajectory now looks to be reversed: Public borrowing will now be around £240bn (9.3 per cent of GDP) in 2022/23 and will still be over £100bn in 2025. As a result, the debt-to-GDP ratio is likely to reach 100 per cent by 2030.
That risks putting the public finances on an unsustainable path, which could result in another round of painful and damaging austerity after the general election. It’s either that, or a further deterioration in the value of the pound – which is already at its lowest level in almost 50 years.