So now we know what a “fiscal event”, badged variously as a ‘mini-budget’ or a ‘fiscal announcement’ looks like. And there is nothing ‘mini’ about it. In fact, today’s fiscal event contained the largest set of tax cuts since 1972, totalling in excess of £40 billion.
In normal budgets, we are used to the Chancellor standing up around midday and talking at length about the economy and the state of the public finances, and then dropping a few comments in about tax. As soon as they sit down the Treasury and HMRC publish reams of detailed material: draft legislation, commentary, new consultation documents. Our experts spend the next few hours digesting these and trying to work out what actually is being proposed. Much of the interest is buried deep in the small print.
Not this time. No long discourse on the fiscal balance, no OBR forecasts, no detailed costing of the proposals. Just big tax announcements, one after the other.
What we saw was classic supply-side policies that hark back to the late 1980s. A statement of intent which sets a different path for tax policy and a hand-brake turn on Sunak’s approach of higher taxes with targeted interventions to pick winners. Levelling up is now to be achieved through tax-advantaged investment zones rather than through grants and subsidies. This was a mini-budget with a bouffant perm and chunky shoulder pads.
After a cruel summer households may have been hoping for more immediate relief in the form of targeted support for the most vulnerable. But, even taking into account the reversal of the national insurance rise and health and social care levy and the 1 per cent basic rate cut, the tax cuts were focused on the most wealthy. This will generate debate of whether trickle-down economics really work. We know Biden isn’t a believer but maybe this back to the future tax policy approach will prove him wrong. Stranger things have happened.
For all of its headlines, it still feels like the announcement was not as radical as it could have been in some areas. In the run-up to the event, there were many careless whispers of what we might see. On the day there was no cut in the rate of VAT, no eye-watering increase to the higher rate tax threshold, and no outright abolition of stamp duty. Kwarteng mentioned business rates reform but many chancellors before him have mentioned it. Doing something is a different matter.
Instead, the Chancellor delivered on a few well-trailed but expensive cuts and pulled a couple of rabbits out of the hat with the repeal of the off-payroll working rules and the abolition of the additional rate of income tax.
As expected, and widely trailed, the Chancellor announced that the corporation tax rate will stay at 19 per cent with the planned increase to 25 per cent for companies earning over £250,000 in profit being cancelled. Alongside this, the banking levy will remain at 8 per cent. We will once again be able to boast of having the lowest corporation tax rate in the G20.
Tax paid is a function of the rate and the base and it seems that we have reverted to George Osborne’s ideology of a low rate coupled with a broad base, rather than Rishi Sunak’s (and Rachel Reeves’) one of adopting a higher rate but picking winners through targeted interventions. The government’s factsheet on the cancellation of the rate increase states that this will save companies £18.7 billion per year by 2026/27 and c.£67.5 billion over the scorecard.
Businesses are watching out for the date of substantive enactment of the rate freeze, the point at which it will need to be incorporated into financial reporting. It is difficult to see how legislation could be substantively enacted before the end of December 2022 and so a date in early 2023 would seem more likely.
Health and Social Care Levy
As was widely expected, the government has cancelled the national insurance increase that added 1.25 per cent to contributions (NIC) from April of this year. The health and social care levy which was to be introduced next year to replace the temporary NIC rise is also being scrapped.
The increase applied to both employee’s and employer’s NIC meaning that there was a double hit for employment arrangements, furthering the distortions that already exist in the taxation of work between employed and self-employed arrangements. The cut will be welcomed by businesses and individuals although implementing system payroll changes by 6 November could be challenging. The accompanying factsheet anticipates that some may find the changes backdated in December and January once system changes are in place.
Some businesses will also be pleased by the Chancellor’s announcement to reform the IR35 rules by scrapping the 2017 and 2021 changes covering off-payroll working. The changes will effectively shift the compliance burden in applying IR35 to the worker providing their services through an intermediary rather than the end user.
These changes have represented a huge compliance burden with companies having to review their entire contractor population. The reforms were originally brought in to deal with non-compliance with the IR35 regime and, in his speech, the Chancellor stated that compliance would be monitored. The trouble is, in most cases, they’ve already taken the pain. At a stroke that now becomes a sunk cost.
During Liz Truss’s leadership campaign she platformed kickstarting the economy through investment zones.
The headlines were announced today. Taxes for businesses in the designated zone will be cut for ten years with tax reliefs for structures and buildings being accelerated (to 20 per cent) and 100 per cent first-year tax relief for qualifying plant and machinery. There will also be stamp duty exemptions on purchases of land and buildings for commercial or new residential developments, no business rates and no NICs for new employers on the first £50,000 earned.
The government has yet to announce where these zones are to be, but discussions are ongoing with around 40 local authorities. Overall the investment zones feel very much like a throwback to the enterprise zones of the Thatcher and Major governments.
Businesses making investment decisions will want information on the investment zones to be available quickly. It is also important that the government offers some form of up-front certainty if the initiative is really going to take off.
The planned R&D reforms to expand the relief to pure mathematics research, data and cloud computing into scope and refocussing the reliefs towards innovation in the UK will go ahead. The limitation of the relief in relation to overseas workers will be a disappointment to businesses who were hoping the relief might be broadened or relaxed to create an environment which is truly Einstein a Go Go.
Other mini giveaways continued to roll in. Planned increases to alcohol duty will not go ahead, which won’t quite turn your local pub into Club Tropicana where the drinks are free, but every little helps. The planned decrease of the Annual Investment Allowance will also be scrapped, and the increase in the banking surcharge threshold will still increase to £100 million. Enterprise Investment Scheme and Venture Capital Trusts will be extended beyond 2025, and from April 2023, firms will be able to raise £250,000 under the Seed Enterprise Investment Scheme.
Against this business bonanza, it is worth spending a few moments looking at what was missing.
It was perhaps strange to see no announcement on the super-deduction. Businesses were hoping to see the super-deduction become a permanent feature of the UK’s tax landscape, with it perhaps being more targeted towards societal goods such as green investment. For the time being at least, it looks as though generous capital asset deductions are to be reserved for investment zones and therefore contribute only to the levelling up agenda.
Business Rates reform remains, for now, a shattered dream. Post-Brexit freedoms were downbeat with the cap on bankers’ bonuses being removed but no other new announcements.
In the meantime, the playlist for Heads of Tax largely remains unchanged. There was no announcement on Pillar Two and so teams will need to continue assessing the impact of the new global minimum tax into their systems and financial reporting structures. The focus will continue to be on data and compliance.
The reversal of the NIC changes and the health and social care levy help individuals as well as employers. Interestingly there is no plan to reverse the threshold increase that was announced by Rishi Sunak shortly before the NIC changes came into effect. This means that many individuals will now pay less national insurance than before the health and social care levy was announced.
Looking beyond the NIC announcements, however, it was in the area of personal taxes that the true extent of the new leadership’s belief in trickle-down economics started to show.
The winner takes it all
We had a series of announcements largely targeted at the more wealthy end of the spectrum. The surprise announcement was that the additional rate of income tax of 45 per cent will be scrapped, a measure that benefits only the top 1 per cent of earners. According to HMRC published statistics, there were c563k additional rate taxpayers in the UK during 2021/22. A 5 per cent reduction sounds large but, due to the low number of individuals affected, it does not cost the public purse as much as measures lower down the income scale. It does however raise interesting questions for devolved administrations, particularly Scotland, as to whether they will keep their 45 per cent rate.
The good news for high earners did not stop there. The additional 1.25 per cent that was added to dividend taxation at the same time that the national insurance increase was announced last year will be repealed. Overall, the top dividend rate will reduce from 39.35 per cent to 32.5 per cent.
As was widely trailed, the 1 per cent cut to the basic rate of income tax will be brought forward by one year and will now be effective from April 2023, costing about £5 billion.
There were rumours that we might see much more costly tax cuts with perhaps the threshold at which a higher rate tax of 40 per cent kicks in being increased to £80,000. Sweet dreams are made of this kind of surprise tax cut, but this time they proved to be false.
In a boost to entrepreneurs, the maximum value that can be given to employees through the Company Share Ownership Plan (CSOP) regime has doubled to £60,000.
There was also an announcement of VAT-free shopping for overseas tourists once a digital system is in place.
We had also heard rumours that Stamp Duty Land Tax (SDLT) would be abolished but the rumours ended up being more exciting than the actual announcement. The nil rate band for all buyers has doubled to £250,000. First-time buyers will only pay SDLT on homes over £425,000 and first-time buyers can access relief on properties up to £625,000. This is essentially an inflation adjustment to bandings.
The majority of today’s announcements do not make fundamental changes to the way the tax system operates.
There were no major reforms but there were substantial cuts to rates and a fundamental shift in tax policy approach. This new path is essentially an experiment which is being implemented under pressure. Conservative policies of the last 12 years have not achieved the holy grail of economic growth and increased productivity. Perhaps the view in number 11 is that the only way is up.
The experiment is not without risk in the form of increasing levels of national debt and inflation. This government has two years to prove that the experiment works before a general election. At that point, we will see whether this new conservativism fades to grey.