Kwarteng’s not-so-mini Budget: Business Support

UPDATE: The government will reverse almost all tax measures announced in its mini-budget. Plans to cut the basic rate of income tax to 19% have been shelved and support for energy bills scaled back. The mini-budget caused turmoil on financial markets. Jeremy Hunt will reveal his first Autumn Statement as chancellor on Thursday, 17 November. See here for most up to date articles.

During the fiscal statement, the Chancellor announced a range of measures to ease the pressure on businesses across the country.

In addition to scrapping the 1.25 percentage point health and social care levy (as above), which the Treasury says will make it cheaper for businesses to employ more staff, Kwarteng went further to cut taxes on businesses as well as push for increased development in some regions of England.

Covered below are: the corporation tax rise cancelled, IR35 rules repealed, Low-tax investment zones, VAT, Capital investment, the banker bonus cap, and alcohol duties. We also have articles covering the personal impact of the new mini-budget and the energy support package.

Corporation tax rise cancelled

Previously, corporation tax was due to increase to 25% next year for company profits over £250,000, while the tax on profits between £50,000 and £250,000 would remain at 19%. But during the speech, Kwarteng confirmed that the increase would be cancelled. This means that the UK’s corporation tax rate will remain at 19% for all UK companies, which the Government claims will bring almost £19 billion a year back into the economy.

The extra money, the Chancellor said, will allow businesses to reinvest, create jobs, raise wages or pay dividends that support pensions.

In line with this change, Kwarteng declared the cancellation of the scheduled change to the bank corporation tax surcharge rate – which would’ve seen an extra 8% charge on top of corporation tax. This means banks and building societies will continue to pay 27% tax on profits. To promote the continued growth of the UK banking sector, the £100m increase in surcharge allowance will still go ahead.

Martin McTague, national chair of the Federation of Small Businesses (FSB), said:

“It’s good that the planned corporation tax increase has been scrapped. The £50,000 threshold for the main rate would have captured many small firms, so keeping tax on profits over £50,000 at 19% is welcome.

“This will free up funds for small businesses to invest, and mitigate the impact of continuing high inflation levels.”

IR35 rules repealed

IR35, which was first introduced in 2000, was brought in to tackle tax avoidance from contractors and their employers.

In his speech, the Chancellor announced that the IR35 rules introduced in 2017 and 2021 would be repealed, helping to simplify off-payroll working, which has added extra costs for businesses that use contractors and subcontractors. This means that it is no longer the responsibility of the employer to decide whether an employee is inside or outside IR35. Instead, the onus will be on the employee to declare and pay their tax obligations to HMRC, directly after invoicing the company.

Low-tax investment zones

In a bid to support growth across the entire country, the Chancellor announced new low-tax investment zones. Currently in discussion with 38 areas of England, including Teesside, Norfolk and the West Midlands, the plan would see tax breaks to encourage businesses to set up and develop in these regions.

Not only will these tax zones support businesses, but new sites will also be designated for housing development, aiming to support the wider communities.

In these specific areas, newly occupied business premises will benefit from a 100% business rates cut. This will also extend to some businesses expanding into the new low-tax investment zones. Councils hosting the investment zones will receive 100% of the business rates growth in designated sites above an agreed baseline for 25 years.

A new allowance will also be brought in for buildings and enhanced structures, which will allow businesses to reduce their taxable profits by 20% of the cost of qualifying non-residential investments per year, relieving 100% of their cost of investment over five years.

Businesses in these zones will benefit from an enhanced capital allowance scheme which means a 100% first-year allowance for qualifying expenditure on plant and machinery assets.

Employers will have zero-rate employer NICs on salaries of any new employees working in the tax sites for at least 60% of their time on earnings up to £50,270 per year. Anything above this threshold will incur employer NICs as usual.

VAT

Although there was speculation that VAT rates would be cut for businesses from 20% to 15%, this was not the case. Instead, the Chancellor announced that a new shopping scheme would be brought in which will get rid of VAT for tourists. Anyone visiting the UK will pay no VAT on products bought from the high street, airports and other departure points and exported in their luggage.

The Government has not yet announced in full detail how this system will work, but has said it will modernise the scheme that currently operates in Northern Ireland and introduce a digital scheme in Great Britain. Any further announcements will follow a consultation on the design of the scheme.

Currently, it is uncertain whether the onus of declaring the VAT on these sales will be on the customer or the business owner.

Capital investment

To further support and develop businesses, the Chancellor said the Government will make the temporary cap of £1m for the annual investment allowance (AIA) permanent.

Originally expected to expire on 31 March 2023 and return to its previous level of £200,000, the allowance allows businesses to invest in plant and machinery assets worth up to £1m. This means that businesses will be able to reclaim 100% of qualifying costs in the year of purchase.

Shevaun Havilland, director general of the British Chambers of Commerce (BCC), said:

“Firms will be glad to see the AIA made permanent. It is a crucial tool which gives them the confidence to push ahead with investment, and will add greater certainty to their plans, now we know it is guaranteed to remain.”

The Government will also expand accessibility to the seed enterprise investment scheme (SEIS) and the company share option plan (CSOP). And, although no official announcements were made, the Government has said it would support an extension of the enterprise investment scheme (EIS) and venture capital trusts (VCT) past their scheduled end date in 2025.

As part of the Government’s growth plan, it will also introduce a long-term investment for technology & science (LIFTS) competition, providing £500m of investment. This will go live as soon as possible next year.

One measure that was only briefly mentioned in the Chancellor’s speech, but discussed further in the official documents, was a reform of the pensions regulatory charge cap. In the growth plan paper, it states:

“The Government will bring forward draft regulations to remove well-designed performance fees from the occupational defined contribution pension charge cap, ensuring that savers benefit from higher potential investment returns.”

The hope is that this will provide “clarity for institutional investors to help unlock investment into the UK’s most innovative businesses and
productive assets.”

Banker bonus cap

One of the most controversial announcements delivered by Kwarteng was the removal of the banker bonus cap. Currently, the bonus cap is set at 100% of a banker’s annual salary, with an option of being doubled to 200%, dependent on shareholder approval.

During the speech, Kwarteng said:

“All the bonus cap did was to push up the basic salaries of bankers, or drive activity outside Europe. It never capped total remuneration, so let’s not sit here and pretend otherwise.

“So we’re going to get rid of it. And to reaffirm the UK’s status as the world’s financial services centre, I will set out an ambitious package of regulatory reforms later in the autumn.”

This announcement was met with heavy criticism by Shadow Chancellor Rachel Reeves, as well as others, who lambasted the prioritisation of the private sector over the NHS. Pat Cullen, general secretary and chief executive of the Royal College of Nursing, said the decision to cut the cap on bankers’ bonuses shows the Government is focusing on “the wrong priorities”.

“Nurses will be dismayed by the decision to prioritise well-off bankers over NHS and social care staff, some of whom are using food banks and live on a financial knife-edge,” she said.

Alcohol duties

Alcohol duty, one of the so-called ‘sin taxes’, will be reformed too, as the Government will freeze duty rates for all categories from 1 February 2023. Any reforms to the system will be implemented on 1 August 2023 following a consultation.

An 18-month transitional period will begin for wine duty. There will also be an extension to draught relief to cover smaller kegs of 20 litres and above to help smaller breweries.