Nigel Bostock, Chief Executive
With interest rates rising to 2.25% on Thursday, their highest since 2008, inflation also at exceptional levels, continuing fears of higher fuel costs, and already soaring levels of UK debt, post pandemic, the Chancellor had an unenviable task today of striking the right balance.
While the announcements provide positivity for many, caution is noted for those who were expecting even more wider sweeping tax cuts from the Chancellor. Their disappointment will be at the balance of the government managing the public purse as the UK continues to seek economic growth and prosperity in a post-Brexit and pandemic world.
Jane Mackay, Partner and National Head of Tax
While deemed a mini-Budget, this was more a massive tax cutting exercise – the biggest since 1972. As part of the vision to stimulate growth there were some unexpected cuts announced including a reduction in income tax rates with the basic rate reducing to 19% and additional rate of 45% abolished, stamp duty cuts, and wide-reaching tax reliefs for around 40 Investment Zones. These came on top of the expected tax increase reversals, many of changes made by Kwarteng’s predecessor (Rishi Sunak). The Chancellor has thrown everything including the kitchen sink into the tax cutting measures. With the government itself estimating that the tax cuts will cost £161 billion over five years, borrowing more to fund this feels like a gamble. Let’s hope it pays off.
Laurence Field, Partner, Corporate Tax
Abandoning the increase in the rate of corporation tax from 1 April 2023 will be welcomed by many businesses. Having one single rate, rather than the proposed 19% for smaller companies and 25% for larger ones, greatly simplifies the tax system. It will be a relief to many smaller businesses who would have found themselves paying 25% tax on relatively modest profits. While not a surprise I welcome the speed of the announcement coming only three weeks after taking office. With inflationary pressures eating into cashflows it gives companies greater certainty about both tax rates and the timing of tax payments for the coming year.
The abolition of the bankers bonus cap was in the news from the moment the period of mourning for HM Queen Elizabeth II ended. Introduced in 2008 it was designed to stop paying bankers bonuses that were multiples of their base salary. In practice, banks simply increased base salaries to compensate their high performers and baked in those fixed costs. The move to abolish the cap is more about giving a low cost yet highly political signal, that the UK is looking both to break with EU regulations and is looking to gain a competitive advantage over its neighbours. In any event, the regulatory environment has changed considerably since 2008 and with it the opportunities for risky financial behaviours.
Meeting a growth target of 2.5% will require more than action on tax rates and this seems to be an early (and easy) way of demonstrating a commitment to make the UK attractive to key sectors, especially one where the UK has been a world leader.
Simon Crookston, Partner, Corporate Tax
The Chancellor should have been bold and provided greater incentives for businesses to be innovative and invest. There are targeted reliefs for businesses in Investment Zones but for those businesses not in these zones there is limited additional support.
The Chancellor seems to have wanted to establish clear water between the current government and the Johnson regime by reversing previously announced tax income tax, NI and corporation tax rate increases, but there was limited other actions taken. The removal of the additional 45% income tax rate band was unexpected and welcome. However, in these current times of increasing inflation and reduced growth we need to further stimulate the economy to encourage growth, enable real time wage increases and promote prosperity.
It is a real shame that the Chancellor did not provide further additional incentives to encourage further investment in solar, wind, water turbines and other green initiatives, particularly in relation to renewable energy. We need to radically change our approach in the current energy crisis and the Chancellor seems to have ignored this in his new approach for a new era.
Caroline Fleet, Partner, Corporate Tax
Increasing the Stamp Duty Land Tax (SDLT) tax-free thresholds for purchases of residential property will certainly add fuel to the property market. The Chancellor has indicated that the proposed changes are to be permanent, rather than recent “SDLT holidays”, which lead to bunching of transactions, panic buying and additional pressures for conveyancing lawyers. House buyers and the real estate industry will be hoping that the Chancellor’s definition of ‘permanent’ does have a long horizon in order to smooth out the market impact of SDLT changes. However, this measure does nothing to address the fundamental issue regarding the overall supply of housing. The Chancellor also announced today that the government will prioritise reforming the planning system, opening up Investment Zones and national infrastructure projects. These elements are vital, and need to be implemented without delay, if we are to increase our housing supply.
Nicky Owen, Partner, Professional Practices
Reversal of the 1.25% rise in National Insurance Contributions is happening from 6 November; any reduction in people costs will always be welcomed.
With the current shortage of talent that firms are currently experiencing, this reduction is unlikely to be noticed.
People costs are rising, as firms hike up salaries in a bid to recruit and retain talent and compensate for loss of talent.
The impact on recruitment means people are stretched and this will have an impact on the wellbeing of people and performance.
HR teams are looking for innovative ways in which to recruit and retain people. Firms need to understand the motivators for their people and provide ever more flexible and bespoke packages.
Chancellor Kwasi Kwarteng’s first fiscal event went largely as expected and will be welcomed by family businesses as it followed the tax-cutting agenda set by new Prime Minister Liz Truss. Business owner-managers had already adjusted their forecasts assuming Rishi Sunak’s corporation tax rise to 25% will not, in fact, take place, and will breathe a small sigh of relief at the extra reserves they will be left with as they look to navigate through these times of price volatility (energy and imports in particular), yesterday’s thumping interest-rate rise to 2.25% and full-employment labour market conditions.
The cancellation of the planned Health and Social Care Levy and the November elimination of the 1.25% National Insurance rate rise will also help businesses with trying to fund employees’ demands for rising wages in an era of general inflation creeping above 10% and forecast to stay there in the short term. The 1.25% tax rise on dividends will also be reversed in April 2023, which will make 2022/23 an anomalous year and will cause some business owners to examine dividend timing which may impact tax receipts on a macro level.
There were rumours of widescale alterations to the 20% basic rate of income tax or personal allowances. This elimination of the additional rate of 45% from April 2023 will be welcomed by many of our clients and the general cut of income tax to 19% will benefit over 30 million people.
The Chancellor announced new low-tax, low-regulation Investment Zones. This follows the ‘freeports’ model; an old idea given fresh impetus last year by Rishi Sunak. Agile businesses will be looking to see where these zones will be and will be weighing the tax and regulatory savings against the costs of moving to the designated areas. At first blush, the National Insurance and business-rate savings do sound substantial and will be worth a closer look.
Johnathan Dudley, Partner and Head of Manufacturing
It is encouraging to see that the annual investment allowance (AIA) is continued at £1 million, which stimulates continued and essential investment in recapitalising the manufacturing economy. However, we note that effectively with the corporation tax rate being maintained at 19% it now looks like the super deduction will fade away in April 2023 as originally planned.
Unless there are anti avoidance provisions emerging in the next few days there is a planning opportunity until April, as with rates staying at 19% there is a genuine saving to be made rather than the original intent of it being a cashflow benefit and for businesses spending more than £1 million – the extension of the super deduction is even more attractive.
The Investment Zones will hopefully provide some additional stimulus but as with enterprise zones, there is a potential for a postcode lottery and for economic activity to reduce just outside those zones wherever they are announced to be.
There is a clear drive to encourage and support construction in a number of areas which presents a real opportunity for manufacturers in the construction industry supply chain and also the relaxation of the IR35 rules will potentially benefit both the manufacturing industry and construction businesses it services.
Stuart Weekes, Partner, Corporate Tax
This mini-Budget arguably leaves us with more questions, than answers: Is this really the start of a new era or just a desperate statement hanging onto the hope that reducing taxes will kick start the economy? Facing tough economic challenges, rising prices and a recession, does the Chancellor have insight or is this simply a roll of the dice? There are incentives for businesses but does the Chancellor really value innovative businesses?
SMEs take risks by investing in research and development and should be embraced by the UK government. Many SMEs really value the tax repayments provided by the R&D tax credit scheme but are subject to a PAYE cap. Reducing personal taxation will limit the R&D tax relief SMEs will receive. In an era where the tax authorities are taking a tougher stance with companies making R&D tax credit claims combined with the impending introduction of stricter regulation, some might wonder whether this government really values innovation.
Rebecca Durrant, Partner, National Head of Private Clients
While the 1.25% reduction in National Insurance Contributions (NIC) seems like good news for taxpayers, the cost to the exchequer is around £30 billion, an amount that had been ringfenced for the NHS and social care, so the question is if and how this money will be replaced. It is understood this will come from borrowing, which will push interest rates up increasing costs for everyone.
The Chancellor confirmed a reduction to the basic rate of income tax from 20% to 19% from April 2023, along with the abolition of the top tax rate for higher earners, a saving of 5% for those earning over £150,000 a year, a bold move in the current climate.
The government has come under criticism as these tax cuts benefit the wealthy more than those on lower incomes. For example, taking the NIC savings alone, pensioners and those on lower wages do not pay national insurance so will not benefit at all; those on a salary of £30,000 (which is above the national average) will save £218 and yet those on an income of £100,000 per a year will save £1,093.
This combined with the tightening of the rules on Universal Credit, increased inflation and higher interest rates make it difficult to see how the government is supporting working families as they claim, particularly at a time when the cap on bankers’ bonuses has also been removed.
Jeremy Cooper, Partner, Head of Retail
The retail sector will welcome the announcements made today in the ‘mini-Budget’ given the impact inflation, interest rate rises and eye watering increases in energy costs have had on consumer spending. Whether the proposed cuts to the basic rate of income tax, the reduction in the national insurance or the abolition of higher rate tax will be enough to stimulate growth or not, time will tell. However, the introduction of VAT-free shopping for overseas tourists, coupled with the current low value of the pound will surely make the UK an attractive tourist destination and should have a positive impact for the retail sector, particularly in tourist destinations across Britain.
The increase in the stamp duty thresholds will certainly help towards the cost of purchasing a home but with rising interest rates and further rises expected to curb inflation, it remains to be seen if we will see a boom in house sales and the knock-on effects for home furnishings and DIY retailers.
Nick Latimer, Partner, Private Clients
For higher earners and investors, today’s announcements are great news.
Firstly, the abolishment of the ‘additional rate of tax’ from April 2023 will provide additional benefits to shareholders and beneficiaries of Trusts, as well as higher earners. Dividends tax rates for those with income over £150,000 will reduce from 39.35% to 32.5%, a 6.85% saving, a good reason to delay distributions from family and owner-managed companies until the new tax year. As well as this, it is expected that the Trust rates of tax will also reduce from the additional rates to the higher rates of tax, benefitting discretionary Trusts which accumulate income.
Secondly, from April 2023, the government has confirmed that they will extend tax incentivised share investments (through the SEIS, EIS and VCT schemes) beyond 2025, and the thresholds for raising money through SEIS to £250k, and the annual investment limit to £200,000, which will encourage investment in start-up companies.
Mini-Budget 2022: Cuts to personal tax
Mini-Budget 2022: VAT-free shopping for international visitors reinstated
Mini-Budget 2022: Stamp Duty Land Tax
Mini-Budget 2022: Investment zones
Mini-Budget 2022: Employment and Mobility tax changes
What will the fiscal event bring?
Tax Policy Changes on the Horizon for New UK Government
Disposals of UK residential property by UK residents