The Un-Budget - repercussions from unwinding the Mini Budget
In an “as you were” statement, Chancellor Jeremy Hunt reversed all of the tax changes made by Kwasi Kwarteng that had not already been implemented or legislated for.
Certainty and stability were the watchwords of Hunt’s un-Budget statement, which was designed to calm the markets, and reduce unhelpful speculation ahead of his medium-term fiscal plan due to be announced on 31 October.
For individuals
Hunt made it clear that the following personal tax measures are staying put:
The basic rate of income tax will be set at 20% indefinitely, or until economic circumstances allow for a cut.
The health and social care levy will not be introduced as planned from April 2023.
Dividend tax will not be cut by 1.25 percentage points from April 2023, so those tax rises on dividend income which came in from 6 April 2022, will remain in place.
The additional rate of income tax is fixed at 45%.
National insurance contribution (NIC) rates will revert to those that were in place on 5 April 2022, as the 1.25 percentage cut has already been programmed into payroll software to apply from 6 November 2022. This means that the artificial alignment of the 1.25 percentage point increase in both NIC rates and dividend tax is broken.
Business taxes
When asked, business owners tend to say they want stability in tax rates and policy, so they can plan ahead and assess different options for investing in their businesses.
A rise in the main rate of corporation tax from 19% to 25% had been priced into the investment plans of most companies, as it was legislated to take effect from 1 April 2023.
This rate increase also introduces a complex marginal tax rate for companies with profits between £50,000 and £250,000. Companies with profits of under £50,000 per year will continue to pay corporation tax at 19%, as the legislation stands today.
When Kwarteng cancelled the corporation tax increase to 25% in his mini-Budget, and then Truss reversed that decision on 14 October, many company directors were left confused. Their main concern now is the taxes they pay above the line, such as employers’ NIC and business rates, which are not related to profits.
In the House of Commons the Chancellor confirmed that the cap on the annual investment allowance (AIA) would be permanently set at £1m per year. There was no information about the super deductions of 130% for new plant and machinery, or 50% for new integral features, which are due to cease on 31 March 2023.
There has been no information about the number or scope of the proposed enterprise zones.
Off-payroll working
It appears Hunt will not stomach the estimated £2bn per year tax loss that was expected by removing the off-payroll working rules (which require the engager to enforce IR35). He has decided to keep the off-payroll regime in place for both public sector and private sector contracts.
However, the off-payroll rules do not apply for contractors working for small engagers in the private sector. In a press release on 2 October the government indicated that the definition of “small” could be expanded to include companies with up to 500 employees.
The current definition of small business (not large or medium-sized) for the off-payroll working rules is quite complex as the Institute of Chartered Accountants in England and Wales (ICAEW) explains in TaxGuide 15/21, but for a corporate entity the business needs to meet two out of these three criteria to be small:
annual turnover of not more than £10.2m
balance sheet total of not more than £5.1m
no more than 50 employees on average.
Land taxes
The changes in stamp duty land tax (SDLT) were not reversed by Hunt, as they came into effect immediately for residential property completions made on and after 23 September 2022.
The Welsh government made a copy-cat move to increase its Land Transaction Tax (LTT) starting threshold for residential properties to £225,000 from 10 October 2022.
The Scottish government did not blink in the face of the Mini Budget, and held its land and buildings transaction tax (LBTT) rates and thresholds steady.
It is possible that Hunt will review the SDLT rates or thresholds in future, but such a change would flow against his stability mantra.
Scottish implications
The Scottish Budget for 2023/24 is set to be published on 15 December 2022, which needs to take into account the Barnet formula that allocates money to the devolved regions according to national income, need, and population levels. However, the Barnet formula was devised in 1978 and it is widely considered to be outdated.
The Scottish government has wider powers than the Welsh government to change its income tax rates and bands, so the Deputy First Minister John Swinney, could well change the income tax bands and rates as they apply to Scottish residents.
What’s ahead?
Hunt’s conclusion was “growth requires confidence and stability”, and we agree with him, but change will be necessary to raise more funds.
However, the future is not bright. The energy price cap for domestic properties will now only be in place until 30 April 2023. The government will conduct a review into how to better incentivise energy efficiency beyond that date, and presumably it will introduce a new scheme of support for individuals based on energy use. The Chancellor confirmed that business support for energy costs will be targeted.