24 Oct 2022
On 17 October 2022, just three days into his tenure as Chancellor of the Exchequer, Jeremy Hunt issued a statement which revisited most of the key announcements in previous Chancellor Kwasi Kwarteng’s ‘mini-Budget’ on 23 September 2022, confirming that many would not go ahead. We provided a summary of the position as at 17 October 2022 here.
In Liz Truss’s Conservative party leadership campaign, tax cuts were on the agenda. However, whilst his predecessor had focused on cuts, Jeremy Hunt has hinted that tax rises may be necessary given the current economic climate. The new Chancellor will deliver his Medium-Term Fiscal Plan on 31 October 2022. Although he may choose to focus mainly on the longer-term direction of travel rather than immediate changes, some of the tax announcements he could make are summarised below, though any changes he does announce will need to be considered, costed and supported by independent analysis, in order to be properly understood by stakeholders as permanent and credible.
Discover our predictions for the Medium-Term Fiscal Plan:
VAT and indirect taxes
Other taxes and related announcements
Income tax rates and bands
The new Chancellor considers cutting the basic rate of income tax from 20 per cent to 19 per cent to be unaffordable at present given the current economic outlook, and we have also seen U-turns on the abolition of the additional rate of income tax and the decrease in dividend income tax rates. Whilst Kwasi Kwarteng had promised further tax cuts, potentially including removing the tapering of the personal allowance for those with taxable income in excess of £100,000, it is likely that any income tax changes announced on 31 October 2022 will be rather less radical. Changes that could be made include increasing the personal allowance from the £12,570 level it has been at since 6 April 2021 and extending of the basic rate income tax band. If we do see adjustments to the personal allowance and basic rate band, there may well be a knock-on effect to other bands and allowances, such as the National Insurance contributions (NICs) primary threshold and lower profits limit (the thresholds at which employees begin to pay Class 1 NICs and the self-employed begin to pay Class 4 NICs), the personal savings allowance and dividend allowance, as well as the income thresholds for the transferrable marriage allowance and the high-income child benefit charge.
Pensions tax relief
Although we do not anticipate any changes to the way in which income tax relief is given to pension contributions at this stage, we could see inflationary uplifts to the pension annual allowance and lifetime allowance.
Consolidation of personal taxes on income
A more radical longer-term vision, which builds on the harmonisation of the personal income tax allowance with NICs thresholds, may be to merge employee NICs with income tax. It is highly unlikely that such a change would be immediate, but the Chancellor may seek to consult on a plan to move towards such a structure.
Recognising that it is an unpopular tax, Liz Truss promised a review of inheritance tax (IHT) in her leadership bid. Whilst former Chancellor Rishi Sunak decided not to take any action following the Office of Tax Simplification (OTS) review of IHT in 2019, that review provided several suggestions for simplification. The most straightforward options to reduce the IHT burden on the general population would be to either reduce the headline rate of IHT or increase the thresholds and allowances that are already available. The nil-rate band (NRB), which effectively exempts up to £325,000 of an individual’s assets from IHT, has remained frozen since it was last increased in 2009. The residence nil-rate band (RNRB), which exempts a further £175,000 of value derived from qualifying property from IHT, was introduced with effect from April 2017, but the RNRB rules are complicated and are not available to all taxpayers by design. Arguably, a desirable simplification would be achieved if the RNRB were to be abolished and the amount of the NRB substantially increased to reflect higher asset values due to inflation and other factors arising since its last increase more than 13 years ago. There were other suggestions in the OTS’s review of IHT, including reducing the seven-year accumulation period for transfers of value to five years, as well as scrapping the various gifting allowances – the value of many of which has remained unchanged since the 1980s – and replacing them with a single simplified universal annual gifting allowance. Such measures could reduce the IHT burden on those least able to afford it.
Capital gains tax rates
Capital gains tax (CGT) rates have been historically low since 2016, with the highest rate being only 20 per cent (an additional 8 per cent surcharge applies to gains on residential property and carried interest). Neither Rishi Sunak, Jeremy Hunt, Liz Truss, nor Kwasi Kwarteng have made any recent comments regarding a general change in CGT rates. If tax rises are needed, a small increase in CGT rates may be an easy target, although raising them to the level of income tax rates, as has been suggested in the past, may be a step too far. That said, increasing CGT rates may not go down well with traditional Conservative party voters and, as CGT only makes up a small proportion of the total tax take, this may not be a significant enough measure to give rise to a meaningful increase in tax revenues. Nevertheless, such a change announced up-front may promote a short-term increase in tax receipts as taxpayers realise gains to lock in to CGT current rates.
Capital gains tax rebasing on death
As things stand, assets inherited following a death are rebased for CGT purposes to their market value at the date of death. This was also targeted as an area for review in the OTS’s 2019 IHT review, which noted that the potential tax-free uplift available on death may disincentivise taxpayers from making lifetime gifts due to the adverse CGT position, slowing the passing of wealth even where there is a strong commercial or personal rationale to make gifts. The OTS suggested that the CGT base cost revision could be scrapped to level the playing field between lifetime gifts and bequeathing assets via a will. The overall impact of such a measure would generally be to increase the level of taxation on an individual’s assets, either through earlier payment of CGT on gifts or increased CGT payable in the future following a post-death sale of the assets.
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National Insurance rates and bands
We have seen significant changes to employer and employee Class 1 NICs rates and allowances since April 2022, including: the initial temporary increase in NICs rates prior to the intended introduction of the Health and Social Care Levy that will not now go ahead, which are being reversed effective from 6 November; and, the increase in the primary threshold in July 2022 to £12,570, to align with the income tax personal allowance. To achieve simplicity, it would be practical for any personal allowance increases, as outlined above, to be matched with an identical increase to the NICs primary threshold.
Off-payroll working administrative rules
Jeremy Hunt has scrapped Kwasi Kwarteng’s proposed repeal of the IR35 off-payroll working administrative rules introduced in 2017 for public sector engagers and in 2021 for large and medium-sized private sector engagers, meaning that, for off-payroll working contracts involving such parties, the burden of determining the worker’s employment status for tax purposes under IR35 will remain with them beyond 5 April 2023. Whilst this U-turn is likely to protect tax revenues, the administrative burden of applying IR35 remains a source of contention for those affected by it and the underlying need to identify a clear line between employment and self-employment for tax purposes and simplify the very complicated application of IR35 should be a top priority for the new Chancellor.
In his mini-Budget, former Chancellor Kwasi Kwarteng announced an increase to the value of options issued under company share option plans (CSOPs) companies can issue to employees, from £30,000 to £60,000, which Jeremy Hunt confirmed he is keen to follow through with in April 2023. Given broad consensus on the desire and need to boost economic growth, we may see announcements extending other tax advantaged share schemes and the wider tax treatment of employee incentives.
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In previous economic slowdowns the Government has sought to incentivise capital investment, to promote employment and long-term productive growth, by creating a favourable capital allowances regime. A major incentive for capital investment, the current 130 per cent ‘super-deduction’ for company spending on most new plant and machinery, is due to end on 31 March 2023, and an initial wide-ranging consultation on potential changes to the capital allowances regime took place earlier this year. As part of the package of measures announced on 23 September 2022, former Chancellor Kwasi Kwarteng announced that the limit for the annual investment allowance that provides 100 per cent tax relief for capital expenditure in the year of acquisition, which had previously been due to fall from £1m to £200,000 from 1 April 2023, will remain at £1m permanently. Whilst this move has been welcomed by many, it does little to encourage additional investment by larger businesses for whom £1m may be insignificant. Furthermore, the consultation had implied that the Government was looking at wider reforms to the capital allowances regime and so, as part of the Medium-Term Fiscal Plan, the Chancellor may make further announcements or launch further consultation on potential reforms in this area. However, it is possible that he will want to take more time to formulate his preferred policy for tax relief on capital investment, and announcements relating to such reliefs may therefore be delayed until the next ‘full’ Budget, which is currently expected to take place in early 2023.
The bank surcharge effectively means that banks pay a higher effective rate of corporation tax on profits above a certain level compared to other businesses. The current rate of the surcharge is 8 per cent, which when combined with the current corporation tax rate of 19 per cent, results in banking profits above the specified threshold being taxed at 27 per cent. Finance Act 2022 legislated for the banking surcharge to be reduced to 3 per cent from April 2023, to counterbalance the increase in the main rate of corporation tax to 25 per cent from that date. Whilst in his ‘mini-Budget’ on 23 September 2022, Kwasi Kwarteng announced that the main corporation tax rate would remain at 19 per cent, this decision was later reversed by Jeremy Hunt on 14 October 2022. However, the announcement on 14 October 2022 did not confirm whether the planned reduction of the banking surcharge would also go ahead, and the Treasury has stated that confirmation of what will happen to the surcharge will be included in the Medium-Term Fiscal Plan. Some are now speculating that the surcharge will remain at 8 per cent, which, when combined with the 25 per cent corporation tax rate that will apply from April 2023, would result in banking profits above the specified threshold being taxed at 33 per cent. Whilst this would no doubt help to plug the hole that is generally believed to exist in public finances, it would counteract other measures introduced by Kwasi Kwarteng to boost the UK’s financial services sector, which included lifting the cap on bankers’ bonuses, one of the few headline measures announced on 23 September 2022 which has so far not been reversed.
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VAT and indirect taxes
Customs duty and clearance
Earlier this year, the Government consulted international traders and other interested parties for views on how the UK’s customs system can be improved, as part of the preparatory work related to the Government’s 2025 UK Border Strategy project that aims to improve and modernise the customs clearance of goods entering the UK and a wide range of other border processes, such as immigration, security and biosecurity. In its summary of responses received, the Government stated that further details of its plans for a new global border regime will be announced this autumn and the Chancellor may announce a ‘trusted trader’ system to streamline customs clearance of goods.
Online sales tax
The Government consulted stakeholders for their views on the design of a possible new tax on online sales in the spring of 2022, with the aim of identifying whether such a tax could help rebalance taxation of the retail sector between online and high street vendors. This may allow for a reduction in business rates, to address concerns that retailers trading wholly or mainly from physical retail premises that pay business rates for those premises, may face an unfair tax burden compared with retailers trading wholly or mainly online. The consultation drew a mixed reaction, due to the likely complexity of such a tax and doubts that it could achieve its aims. The Chancellor may confirm whether or not he plans to proceed with the online sales tax concept and, if so, set out a timetable for further consultation.
The VAT land exemption
At the start of 2022, HMRC released a summary of the responses received to a consultation on possible reforms to the VAT regime for land and property, the complexity of which it accepts is causing difficulties for the real estate sector. The consultation identified four options for simplification of the VAT rules in this area, being:
- making short-term and minor interests in land and property subject to VAT;
- reviewing the anti-avoidance rules relating to the option to tax land and property;
- establishing a more comprehensive and accessible register of existing options to tax to allow taxpayers to check whether a supplier has opted to tax a particular property; and
- removing the option to tax altogether and making supplies of land and property subject to VAT by default with a limited number of exceptions (eg for residential accommodation and buildings used for a charitable purpose).
Following informal discussions with stakeholders during 2022, the Chancellor may announce a second phase of formal consultation before any of these proposals are confirmed.
VAT on financial services
The Chancellor may launch a review of the VAT treatment of investment fund management fees, which was promised in the 2021 Autumn Budget, with scope for a more general review of VAT on financial services at a later stage.
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Other taxes and related announcements
Property stamp taxes
Kwasi Kwarteng doubled the nil-rate band for stamp duty land tax (SDLT) on residential property from £125,000 to £250,000 with effect from 23 September 2022, whilst also increasing both the threshold beneath which, and the maximum value of property for which, first-time buyer’s relief applies. Jeremy Hunt confirmed that these changes will be upheld on 17 October 2022. Given the economic outlook, it is plausible that the non-residential SDLT nil-rate band could be extended to support the commercial property market. Whilst we may not anticipate any other broad changes to SDLT, we may see some more specific announcements following an HMRC consultation relating to mixed-property purchases and multiple dwellings relief, issued in November 2021. The aim of the consultation was to prompt discussion around changes intended to make the system fairer and reduce the scope for incorrect or abusive claims for relief from SDLT. It is possible that we may hear decisions on, or see draft legislation for, these proposed changes.
The Welsh and Scottish governments are responsible for devolved property stamp taxes. The Welsh Government extended the land transaction tax (LTT) nil-rate band from £180,000 to £225,000 whilst also amending some of its rates and bands, with these changes taking effect from 10 October 2022. The Scottish Government is set to provide an update on land and buildings transaction tax (LBTT) in the week commencing 24 October 2022.
As part of the September 2022 mini-Budget, Kwasi Kwarteng announced that, in order to boost economic growth and support its levelling up agenda, the Government would create an unspecified number of ‘investment zones’, designated areas where businesses can benefit from tax incentives and streamlined regulatory requirements. Local authorities had until 14 October 2022 to express an interest in the scheme. The investment zones policy is one of the few significant measures announced as part of the mini-Budget which has, to date, not been reversed. It was also a measure for which a potential costing was not published in the mini-Budget documents because, according to the Government, full implementation details had yet to be determined. There is now speculation in some parts of the media that the Treasury is concerned about the potential cost of the investment zone tax incentives originally proposed in the mini-Budget, given wider concerns regarding the UK’s expected budget deficit. We expect the new Chancellor to provide further details on the investment zone scheme in the Medium-Term Fiscal Plan, but the tax incentives available as part of the scheme may be less generous than many may have originally expected.
In May 2022, then Chancellor Rishi Sunak introduced a 25 per cent energy profits levy for profits generated from extracting UK oil and gas, which is currently due to end by 31 December 2025. In recent months, there have been calls to extend the levy to help fund the energy price guarantee, but Liz Truss stated during the Conservative party leadership race that she was against such a measure. However, in his speech to Parliament on 17 October 2022, the new Chancellor, Jeremy Hunt, stated that he was not opposed to windfall taxes in principle, leading some to speculate that he might announce an extension of the current energy profits levy past December 2025, or even levies on other businesses that are generating windfall profits as a result of the war in Ukraine. In addition, the Government announced on 11 October 2022 that it would impose a temporary limit on the revenues generated by companies that produce power from low carbon technologies. As revenues earned above the limit will be paid over to the Treasury, many consider this to be a windfall tax in a different guise. Whilst the cap will apply from the start of 2023, limited details of the measure have so far been published, including the level at which the cap will be set. The Government has confirmed it will consult on the precise mechanics of the cap, so it is unlikely that full details of the measure will be announced as part of the Medium-Term Fiscal Plan; however the Chancellor may announce the level at which the limit will be set.
Sovereign immunity from UK direct taxes
During the summer of 2022, the Government consulted on proposals for reforming how foreign sovereign persons (individual heads of state and foreign governments) are treated for UK direct tax purposes. The consultation proposed that, whilst sovereign persons will continue to be exempt from UK taxation on UK sourced interest income relating to non-trading activities, they will no longer be exempt from direct taxation on other forms of income and gains, such as trading income, property rental income and capital gains. These reforms are intended to align the UK tax treatment of sovereign persons with the tax treatment that they obtain in other comparable jurisdictions. Although the proposals could result in the UK becoming less attractive as a destination for foreign sovereign investment, the new Chancellor may confirm whether the Government intends to go ahead with the proposals outlined in the consultation and, if so, the timeframe for the publication of draft legislation.
Taxation of decentralised finance
The Government has also recently consulted on reforming the taxation of decentralised finance (DeFi), involving the lending and staking of crypto-assets, as the tax treatment that currently applies often does not accurately reflect the underlying economic reality of the transactions concerned. Several options for reforming the tax treatment were proposed as part of the consultation. Details of which option will be implemented, along with the timeframe for the publication of draft legislation, may now be confirmed by the new Chancellor on 31 October 2022.
Rateable values of commercial property are scheduled to be updated in April 2023, based on April 2021 market rents, which could be significantly higher than the existing basis of valuation in some cases and may therefore act as a disincentive for businesses to invest in commercial property. Business rates reform is considered to be needed by many, as partially evidenced by the need for and mixed reaction to the online sales tax proposal referred to above. The Chancellor may therefore take the opportunity to announce a review of business rates to the address concerns raised by many businesses.
The Office of Tax Simplification
His reign as Chancellor may have been short, but Kwasi Kwarteng’s abolition of the Office of Tax Simplification (OTS) could have longstanding repercussions. Whilst there may be some merits in putting the burden of simplification directly with HM Treasury, it has been aware of the need for simplicity in tax policy making for many years, yet the UK tax regime has continued to grow in complexity. If HM Treasury is to make ground on tax simplification, a policy needs to be devised that is properly identified and defined, and continues to benefit from the independent views of experts, as provided by the OTS since 2010.