Time to dust off Rishi Sunak Tax Plan
25 October 2022
In these strange political times, we find ourselves in an uncertain world as tax advisers with most of the tax measures in Kwasi Kwarteng’s 23 September “mini- Budget” having now been reversed by the new chancellor, Jeremy Hunt. We await the next fiscal event, scheduled for 31 October, but with Mr Sunak only just being announced as the new prime minister, it remains to be seen whether this fiscal event will be postponed or continue to go ahead.
It is clear that Mr Sunak needs to give certainty to businesses and set out a clear plan for the economy and how the government will balance the books. During the leadership debates, Mr Sunak raised concerns with Ms Truss’s proposed measures and predicted the market turmoil we have experienced following the mini-Budget. As an economic Nostradamus, Mr Sunak’s stock appears to have risen and although he will now be prime minster rather than chancellor, the economy is going to be a key focus of his premiership. It is quite possible that the new chancellor may seek to lean heavily and build on Mr Sunak’s previous work in the office.
In March 2022, the then chancellor, Mr Sunak announced his Tax Plan for “Capital, People, Ideas”. One of the key issues highlighted was that the UK has a long-standing issue with productivity and one of the reasons for this is lack of capital investment. It is clear UK companies invest less as a percentage of GDP than in comparable countries (10% v 14%). The Tax Plan suggests that our tax system does not reward business investment as much as other countries do.
Before the mini-Budget, the UK corporation tax rate was due to rise to 25% from April 2023. Therefore, the UK approach to incentivise capital investment is important to counteract an increasing corporation tax environment.
The mini-Budget reversed the increase, keeping the status quo for corporation tax, but there has subsequently been a U-turn and the corporation tax rate will indeed increase to 25% in April 2023 (assuming this does not change again). Yet despite the reversal on the corporation tax rate, there does not appear to be recognition that more needs to be done to incentivise businesses to commit to increased capital investment in the UK.
In previous economic downturns, the government has tried to encourage capital investment with the introduction of favourable capital allowance rules. We could therefore see Mr Hunt pull this familiar lever once again.
The 130% ‘super-deduction’ for company spending on most plant and machinery is due to end on 31 March 2023 and a wide-ranging consultation on potential changes to the capital allowance regime took place earlier this year. One of the few survivors of Mr Kwarteng’s mini-Budget announcements was the increase of the Annual Investment Allowance, which allows for 100% tax relief for capital expenditure, will remain at £1m. However, that does not necessarily do much to encourage larger businesses, for whom £1m does not go very far, to make additional investment. This is arguably the precise type of investment the government should be seeking to encourage.
We could therefore see reforms or consultations announced in this area or at least a clear intention to introduce change. Mr Hunt could take inspiration from Mr Sunak’s Tax Plan but whilst it set out a number of potential changes the government could make to achieve this, most were rehashes of previous incentives. However, two of the potential options were to:
Introduce an Additional First Year Allowance, to bring the overall amount that can be claimed to greater than 100% of the initial cost of the qualifying investment; or
Introduce full expensing, to allow businesses to write off the costs of qualifying investment in one go.
These two ideas are generous, and in March 2022 were predicted to cost £4bn and £11bn respectively per annum. Now prime minister, Mr Sunak, may find it difficult to introduce such measures whilst trying to balance the books but clearly something needs to be done otherwise the UK may continue to lag behind other countries for years to come.
It is clear that Mr Sunak needs to give certainty to businesses and set out a clear plan for the economy and how the government will balance the books. During the leadership debates, Mr Sunak raised concerns with Ms Truss’s proposed measures and predicted the market turmoil we have experienced following the mini-Budget. As an economic Nostradamus, Mr Sunak’s stock appears to have risen and although he will now be prime minster rather than chancellor, the economy is going to be a key focus of his premiership. It is quite possible that the new chancellor may seek to lean heavily and build on Mr Sunak’s previous work in the office.
In March 2022, the then chancellor, Mr Sunak announced his Tax Plan for “Capital, People, Ideas”. One of the key issues highlighted was that the UK has a long-standing issue with productivity and one of the reasons for this is lack of capital investment. It is clear UK companies invest less as a percentage of GDP than in comparable countries (10% v 14%). The Tax Plan suggests that our tax system does not reward business investment as much as other countries do.
Before the mini-Budget, the UK corporation tax rate was due to rise to 25% from April 2023. Therefore, the UK approach to incentivise capital investment is important to counteract an increasing corporation tax environment.
The mini-Budget reversed the increase, keeping the status quo for corporation tax, but there has subsequently been a U-turn and the corporation tax rate will indeed increase to 25% in April 2023 (assuming this does not change again). Yet despite the reversal on the corporation tax rate, there does not appear to be recognition that more needs to be done to incentivise businesses to commit to increased capital investment in the UK.
In previous economic downturns, the government has tried to encourage capital investment with the introduction of favourable capital allowance rules. We could therefore see Mr Hunt pull this familiar lever once again.
The 130% ‘super-deduction’ for company spending on most plant and machinery is due to end on 31 March 2023 and a wide-ranging consultation on potential changes to the capital allowance regime took place earlier this year. One of the few survivors of Mr Kwarteng’s mini-Budget announcements was the increase of the Annual Investment Allowance, which allows for 100% tax relief for capital expenditure, will remain at £1m. However, that does not necessarily do much to encourage larger businesses, for whom £1m does not go very far, to make additional investment. This is arguably the precise type of investment the government should be seeking to encourage.
We could therefore see reforms or consultations announced in this area or at least a clear intention to introduce change. Mr Hunt could take inspiration from Mr Sunak’s Tax Plan but whilst it set out a number of potential changes the government could make to achieve this, most were rehashes of previous incentives. However, two of the potential options were to:
Introduce an Additional First Year Allowance, to bring the overall amount that can be claimed to greater than 100% of the initial cost of the qualifying investment; or
Introduce full expensing, to allow businesses to write off the costs of qualifying investment in one go.
These two ideas are generous, and in March 2022 were predicted to cost £4bn and £11bn respectively per annum. Now prime minister, Mr Sunak, may find it difficult to introduce such measures whilst trying to balance the books but clearly something needs to be done otherwise the UK may continue to lag behind other countries for years to come.
