New Chancellor Reverses £32bn of Tax Changes with Industry Reaction

THE NEW Chancellor of the Exchequer, Jeremy Hunt, has reversed most tax reductions announced in his predecessor’s mini-budget.

The reversals are said “to ensure the UK’s economic stability and to provide confidence in the government’s commitment to fiscal discipline”.

The Chancellor will publish the government’s fiscal rules alongside an OBR forecast, and further measures, on 31 October.

The following tax policies will be reversed:

• Cutting the basic rate of income tax to 19% from April 2023. The basic rate of income tax will remain at 20% indefinitely. This is worth around £6 billion a year.
• Cutting dividends tax by 1.25 percentage points from April 2023. The 1.25 percentage points increase, which took effect in April 2022, will now remain in place. This is valued at around £1 billion a year.
• Repealing the 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) from April 2023. The reforms will now not be reversed. This will maintain around £2 billion a year.
• A new VAT-free shopping scheme for non-UK visitors to Great Britain. Not proceeding with this scheme is worth around £2 billion a year.
• Freezing alcohol duty rates from 1 February 2023 for a year. Reversing the freeze is worth approximately £600 million a year.

Taken together, these changes are estimated to be worth around £32 billion a year.

The government’s reversal of the National Insurance increase and the Health and Social Care Levy, and the cuts to Stamp Duty Land Tax, will remain. The £1 million Annual Investment Allowance, the Seed Enterprise Investment Scheme and the Company Share Options Plan will also continue.

Energy Bills Support Review

The Energy Price Guarantee and the Energy Bill Relief Scheme will continue from now until April 2023.

However, a Treasury-led review will consider how to support households and businesses with energy bills after April 2023.

The review will aim to design a new approach that will cost the taxpayer less. The Chancellor said any support for businesses will be targeted to those most affected.

The Chancellor stated there will be more difficult decisions to take on both tax and spending to lower debt in the medium term. Government departments will be asked to find efficiencies within their budgets.

INDUSTRY REACTION

Confused and Concerned

Brian Berry, Chief Executive of the Federation of Master Builders

Brian Berry, Chief Executive of the FMB, said: “The building industry won’t be alone in feeling confused and concerned by recent political and economic events. Small, local building firms need the stability and confidence that the new Chancellor has promised today.

“The commitment to retain the Stamp Duty cuts and the promise to incentivise energy efficiency as part of the Government’s support with record energy prices is encouraging. This latter commitment would be best delivered by the Government backing a national retrofit strategy to make our existing homes more energy efficient which would also have the added benefit of creating jobs and growth in every region.”

Significant Setback

Chris Denning, corporate and international tax partner at MHA, said: “Corporation Tax was the obvious candidate for a U-turn last week. The projected tax revenue forgone as a result of not increasing the rate was the largest element of the “tax cutting” mini-budget. Corporation Tax was the government’s main ‘wiggle room’ and the impact of changing course here is large enough to affect the markets.

“This is a shame as the business elements of the mini-budget were well received by UK companies, especially against the backdrop of the significant increase in energy costs. Prior to Covid 19 and the Ukraine war, the government’s ‘Business tax road map’ had the UK on a path to having the lowest corporation tax rate in the G20 at 17% in order to encourage investment (both domestic and inbound) and growth in the UK. A U-turn on this particular measure is a significant setback and is likely to have a negative impact on the UK’s international competitiveness.

“Empirical research has shown an inverse relationship between Corporation Tax rates and wages. As the Corporation Tax rate rises, average wages fall, mainly as a result of lower business investment. Of course, the government need to pay attention to the markets but it is still crucial they put in places measures to put the UK in a better position to secure investment.

From Expansion to Contraction

Brendan Sharkey, Head of Construction and Real Estate at MHA MacIntyre Hudson.

Brendan Sharkey, Head of Construction and Real estate at MHA, said: “Whatever else you might want to say about Kwasi Kwarteng’s mini-budget, it did contain some useful reforms that would have helped UK businesses during this difficult time. Scrapping the IR35 reforms was one of these measures. In the construction sector at any rate, it would have reduced red tape and helped with concerns over engagement of labour when it is in especially short supply.

“Many actually left the industry when the new IR35 rules came into play (in April 2021). However, with increases to the cost of living and with pension funds falling there is now a real incentive to return to work. So, scrapping the IR35 changes would have helped to drive recruitment at exactly the right time. Although the new Chancellor spared the stamp duty reduction this is really a non-event anyway given the increase in borrowing costs.

“We look to be moving from expansion to contraction. Increased interest rates will be very damaging for the sector. Ideally, we need tax relief on mortgage interest for first-time buyers.”

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