Mini Budget for Autumn 2022: Tax Update

The so-called "Mini Budget" presented by Chancellor Kwasi Kwarteng on September 23, 2022, has been variously referred to as a "game changer," a "new approach for a new era," and (maybe less optimistically) a "gamble on growth." In order to assess the viability of the government's proposals in light of the UK's current fiscal and economic circumstances, critics of the government have been quick to point out that the usual Office of Budget Responsibility forecasts has not been released in conjunction with the government's proposals.

The repeal of the Health & Social Care Levy (and reversal of the related interim increases to National Insurance contributions) and increases in various Stamp Duty Land Tax thresholds to benefit home buyers are among the headline items. Other headline items include an acceleration of the previously announced 1% reduction in the basic rate of income tax and the repeal of the Health & Social Care Levy On the business front, the government has announced that it is repealing a number of recent reforms to the existing so-called "IR35 regime," the rules in place since 2000 that seek to tax what are effectively employment services provided through intermediaries. The anticipated increase to 25% (from 2023) in corporation tax rates, as promised by former Chancellor Rishi Sunak, has been cancelled. The "Mini Budget" is a very clear indication that the newly minted Cabinet, which has been in office for less than two weeks, wants to move quickly and significantly differentiate its fiscal action plan policies from those of the outgoing Chancellor.

According to the government, having to pay high and/or complicated taxes lessens the desire to work and prevents investments in businesses. As a result, it has announced the following actions:

Corporate Tax Rates:

Corporation Tax: The primary corporate tax rate's previously announced planned increase from 19% to 25%, which was scheduled to take effect in April 2023, will not take place. The top rate will stay at 19%.

Bank Corporation Tax Surcharge (BCTS): The expected decrease in the Bank Corporation Tax Surcharge (BCTS) rate to 3% that went along with the anticipated increase in corporation tax will also be cancelled. As a result, the rate will now stay at 8%, keeping the entire combined rate of company tax and BCTS at 27%. Nevertheless, as intended, the BCTS limit will increase from £25 million to £100 million (i.e., the number of profits exempt from the BCTS).

Energy profits levy: No notification of a modification to the new 25% energy profits levy implemented in July of this year, nor to the corporation tax rate (30%) and supplementary charge (10%) that are applicable to oil and gas enterprises, were made.

IR35 off-payroll working rules: Off-Payroll Working Regulations (IR35): The IR35 regime, commonly known as the 2017 and 2021 reforms, will be removed as of 6 April 2023. The IR35 regime may be applicable when an individual works for an end client directly rather than through an intermediary (such as a personal services company) to supply services to the client. The end client is now generally responsible for determining whether PAYE income tax and National Insurance payments (NICs) are applicable to the intermediary's fees under the current iteration of the IR35 regime (instead of the intermediary). The regime has a reputation for being challenging to understand, creating a huge administrative burden for firms, and has resulted in major litigation. Workers in the UK who provide services through an intermediary will once more be responsible for identifying their employment status and paying the proper amount of tax and NICs as of April 6, 2023.

Capital Allowances Annual Investment Allowance: Since January 1, 2019, companies can deduct (for corporation tax purposes) 100% of any eligible plant and equipment expenses, up to a maximum of £1 million per year. The yearly investment allowance was supposed to drop to £200,000 starting in April 2023, but this reduction will no longer take place, keeping it at $1 million.

Seed Enterprise Investment Scheme (SEIS): By offering investors who invest in eligible companies with particularly significant income tax, capital gains tax, and other tax reliefs, the SEIS framework promotes investment in early-stage businesses. Previously, businesses looking to take advantage of SEIS had to have no more than £200,000 in gross assets; now, the threshold is £350,000. Additionally, the annual investor cap will quadruple to £200,000.

Company Share Option Plans (CSOPs): Businesses with UK employees can use CSOPs, a type of tax-advantaged share option plan. The present cap on the value of shares under CSOP options (at the time of award) will be raised from £30,000 to £60,000. To connect the programme with the Enterprise Management Incentive (EMI) programme, which is normally more flexible, several further constraints will be loosened.

Income Tax (Additional Rate): The Chancellor said that the additional (45%) rate of income tax will be eliminated beginning in April 2023 in an effort to "simplify the tax system" and enable people to "keep more of what they earn," which was arguably the "Mini Budget's" biggest surprise news. From April 2023, the extra rate for savings and dividends will also be eliminated.

Income Tax (Basic Rate): Starting in April 2023, the base rate of income tax will drop from 20% to just 19%. This is an earlier implementation of the basic rate reduction that was initially scheduled to take effect in April 2024 but was instead announced in the Spring Statement 2022. This adjustment is anticipated to also apply to interest withholding tax and other annual payments connected to the basic rate.

Stamp Duty Land Tax (SDLT): The SDLT nil rate threshold will double to £250,000 for all home purchases starting on September 23, 2022, easing the financial burden on homebuyers. At the same time, the nil rate threshold for first-time buyers' relief will rise to £425,000 (from £300,000) and apply to any property with a value up to £625,000 (rather than just £500,000).

National Insurance Contributions (NICs): Liz Truss promised to rescind the temporary 1.25% increase in the NICs threshold starting on November 6, 2022. The measures outlined in the Spring Statement 2022 to increase the threshold had just started to take effect in July 2022. This measure complements the elimination of the Health & Social Care Levy (see below).

Health & Social Care Levy: The government claims that by totally eliminating the 1.25% levy, which was set to go into force in April 2023, firms will now be able to hire more employees at a lower cost.

Tax on Dividends: The government will reverse the 1.25% increase in dividend tax rates starting in April 2023 in an effort to encourage business owners and investors, which will result in a decrease in the ordinary and upper dividend tax rates to 7.5% and 32.5%, respectively, from the levels in effect in 2021/22.

Bankers’ Bonuses: The government has declared that the Prudential Regulation Authority will abolish the cap on bankers' bonuses as part of its effort to "reaffirm the UK as a financial services centre." With the current limitation, bonuses are essentially limited to 100% of fixed salaries (or 200% with shareholder approval). The Chancellor hinted at forthcoming further regulation.

Tax-free shopping: For non-UK visitors to the UK, the government would implement a "modern, digital, VAT-free shopping programme," with the declared goals of boosting the high street and generating jobs in the retail and tourist industries.

Investment zones: According to the government's announcement, the UK will soon have new "Investment Zones." 38 potential investment zones have been the subject of preliminary discussions. Through tax breaks, lenient planning regulations, and other measures, this policy seeks to encourage investment. The main tax benefits that are being taken into account are as follows:

Business Rates: Newly occupied commercial properties and some existing properties that have expanded into investment zones are 100% exempt from business rates.

Enhanced Capital Allowances on P&M: For enterprises' expenditures on qualified plants and equipment purchased for use in investment zones, enhanced capital allowances on P&M provide 100% uncapped first-year capital allowances.

Enhanced Structures and Buildings Allowance: This allowance allows firms to deduct 20% of the construction costs for eligible non-residential assets from taxable profits each year (providing 100% relief for such costs over a five-year period). Current regulations only provide for a 33-year allowance of 3% annually.

Employer NICs Relief: Any new employee employed in an investment zone will not be required to pay employer NICs on the first £50,270 of their income. Over the £50,270 cap, employer NICs are applied at their regular rates. Keep in mind that employee NICs are unaffected, therefore these savings only apply to employers.

Complete SDLT Relief: On land purchased in an investment zone for commercial use or development for commercial purposes, no SDLT will be due.

The Growth Plan typically lacks in specifics, so it's unclear what more information the government may release later. Later this year, when the government releases its formal budget, it may provide more details on the aforementioned policies as well as any other information.