UK: 2022 September ‘Mini Budget': ‘Mini' By Name Only

Will the most ambitious growth plan in recent memory succeed or just leave a black hole in public finances?

A summary of tax measures announced or confirmed at the 2022 September 'Mini Budget'

At the time of the 2022 Spring Statement, it was envisaged that the main tax event of 2022 would be an Autumn Budget. Since then, the direction of travel has changed radically, with the new Chancellor Kwasi Kwarteng using today's 'Mini Budget' (officially named "The Growth Plan 2022") to launch the Government's new agenda and response to the challenges posed by the energy and general economic crisis.

In an almost complete break with the previous Government's tax policies, the Chancellor announced and confirmed record tax cuts today, including the surprise removal of the 45 per cent top rate of income tax from April 2023.

The main 'Growth Plan 2022' document published today (available here) suggests that the policy decisions confirmed or announced today will cost £45 billion by 2026/27. Yet today's announcements are not accompanied by an independent forecast prepared by the Office for Budget Responsibility (OBR), meaning that the measures' estimated costs have not been independently considered or verified.

Concerns had been raised even before the true scale of tax cuts became clear. A joint report by the Institute for Fiscal Studies and Citi, the investment bank, published on 21 September 2022 (available here) expressed the view that reversing National Insurance and corporation tax rises "would leave debt on an unsustainable path". The scarcity of information available on how the energy measures and tax cuts announced and confirmed today will be funded, would suggest that the Government is largely 'flying blind', and the markets' first response saw Sterling tumbling.

Set against all this is the hope that the promise of lower taxes and generous spending might just create the confidence and sense of freedom and optimism needed to stimulate the economy. Could this be a self-fulfilling prophecy in a positive way? When OBR forecasts taking account of the measures confirmed today are eventually published towards the end of the year, we might get a first indication of whether things are moving in the right direction.

Set out below is a summary of tax measures announced or confirmed today that we believe will matter most to our clients.

'Mini' by name only - will the most ambitious growth plan in recent memory succeed or just leave a black hole in public finances?

Headline tax measures

Income tax - 1 per cent cut to basic rate brought forward and top rate removed

The previously announced 1 per cent cut to basic rate income tax will be brought forward to take effect from April 2023, one year earlier than planned. And, a surprise measure, the top rate of income tax (45 per cent) will be removed at the same time.

With no suggestion of a change of thresholds, the income tax rates applicable for 2023/24 (for non-dividend income) will be as follows:

In support of charities, there will be a four-year transition period for Gift Aid relief to maintain the income tax basic rate relief at 20 per cent until April 2027. There will also be one-year transitional period for 'relief at source' pension schemes to permit them to continue to claim tax relief at 20 per cent.

For dividend income, the dividend upper rate (currently 39.35 per cent) will also be removed, and the dividend higher rate will be reduced to the 32.5 per cent applicable before this year's increase by 1.25 per cent to help fund social care, in each case from April 2023. This will make operating through a company more appealing (especially in the light of the IR35 changes detailed below).

Corporation tax – planned increase of corporation tax rate from April 2023 cancelled and consequential changes to the Bank Corporation Tax Surcharge and Diverted Profits Tax

The corporation tax increase from 19 per cent to 25 per cent for companies with profits exceeding £250,000 and the related incremental increase for companies with profits between £50,000 and £250,000, which were scheduled to take effect from April 2023, have been cancelled. There will continue to be only one rate of corporation tax at 19 per cent.

As a consequence of this change, the decrease to the rate of the Bank Corporation Tax Surcharge (set to take effect from April 2023 in order to counterbalance the corporation tax rise for financial institutions) will also be cancelled. Accordingly, from April 2023 banks and building societies will continue to pay additional tax on their profits at a rate of 8 per cent (rather than a reduced rate of 3 per cent), leading to a combined rate of 27 per cent. However, the previously scheduled increase in the Surcharge allowance from £25 million to £100 million will still go ahead to support growth within the UK banking market.

As a further consequence, the rate of diverted profits tax will now remain at 25 per cent. This had previously been scheduled to increase from 25 per cent to 31 per cent from April 2023 to maintain a 6 per cent differential with the main rate of corporation tax.

National Insurance contributions and Health and Social Care Levy - April 2022 increase of NICs rates reversed and Levy scrapped

As was already announced yesterday, the 1.25 per cent rise in NICs from 6 April 2022 will be reversed with effect from 6 November 2022. However, the previous increase of NICs thresholds to match the point at which people start paying income tax, which was introduced to lessen the impact of the NICs rate increase and take over two million people out of paying NICs altogether, will not be reversed.

In addition, the scheduled introduction of the Health and Social Care Levy – a separate tax set to come into force in April 2023 to replace this year's rise of NICs – will also be cancelled. And on top of this, the 1.25 per cent increase to dividend tax rates from 6 April 2022, which was part of the health and social care package, will be reversed from April 2023.

The Chancellor has expressly confirmed that funding for health and social care services will be protected and will remain at the same level as if the Levy had remained in place. However, he did not provide information on how the amount that the Levy was expected to raise (approximately £13 billion per annum) will now be sourced.

Stamp duty land tax (SDLT) - increase to nil-rate threshold and first-time buyer relief

With effect from today, 23 September 2022, the Government reduced the cost of SDLT for purchasers of residential property.

The previous nil-rate band of £125,000 has been increased to £250,000 (thereby replacing the 2 per cent rate band previously applicable to the purchase price portion from £125,001 to £250,000).

In addition, the nil-rate band for first-time buyers has been increased from £300,000 to £450,000, and relief for first-time buyers is now available in respect of properties costing up to £625,000 rather than the previous £500,000. Thus, a first-time buyer will pay no SDLT up to £425,000 and 5 per cent SDLT on the portion from £425,001 to £625,000.

These measures apply only in England and Northern Ireland. Stamp duty is not charged in Scotland (where purchasers instead pay Land and Buildings Transaction Tax) or in Wales (where purchasers pay Land Transaction Tax), in each case with rates set by the devolved Government. The Scottish and Welsh Governments will instead receive funding through the agreed fiscal framework to allocate as they see fit.

Venture capital reliefs and share incentive schemes

EIS and VCT sunset clauses

The Enterprise Investment Scheme (EIS) is designed to encourage individuals to invest in smaller higher risk companies to alleviate the problems they have in raising finance. Subject to a variety of conditions, investors can benefit from Capital Gains Tax (CGT) relief, CGT deferral and income tax liabilities reduced by 30 per cent of the sums invested up to an annual investment limit of £2 million.

Venture Capital Trusts (VCTs) are investment companies listed on the London Stock Exchange or a European regulated market and set up to invest in small UK businesses. VCT investors are awarded generous tax benefits to encourage their investment.

Since 2015, it has been a requirement (under EU state aid rules) that a 'sunset' clause is included in EIS and VCT legislation. Accordingly, legislation was introduced providing for the EIS and VCT schemes to be brought to an end on 5 April 2025.

The Chancellor has now confirmed that this 2025 sunset clause will be extended, with further details to be announced.

SEIS - extension to limits

The Seed Enterprise Investment Scheme (SEIS) has similar aims to the EIS, encouraging new equity investments in start-up trading companies. The income tax and CGT reliefs follow the same principles as EIS, albeit that income tax relief is given at a more generous 50 per cent with an annual investment limit per investor of £100,000.

The Chancellor has now announced that the following changes to the SEIS will take effect from April 2023:

• The annual investment limit will double from £100,000 to £200,000.
• Companies will be able to raise up to £250,000 of SEIS investment in total, a two-thirds increase from the current limit of £150,000.
• The current age limit of a business being funded by SEIS investment is 2 years. This will now be increased to 3 years.
• The current gross asset limit for a business raising SEIS funds is £200,000, meaning the business must have gross assets of no more than the limit. This limit is being increased to £350,000, corresponding to a 75 per cent increase on the limit.

While this is certainly a step in right direction for businesses seeking funding, SEIS remains a fairly restrictive relief (e.g. it only applies to new equity subscriptions and not to convertible loans), and companies that have previously exhausted their SEIS limits and have gone on to raise investments under EIS will not be able to go back to take advantage of the increased SEIS limits.

Company Share Option Plans (CSOPs)

A Company Share Option Plan (CSOP) is a tax qualified discretionary option plan, under which a company may grant options to selected executive directors and employees. The individual must acquire the shares at an exercise price that is not less than the market value of the shares on the grant date. CSOP tax reliefs are extremely generous, generally allowing gains to be taxed as capital only on the sale of the shares with no income tax liability on either of grant or exercise.

Under the current CSOP rules, an individual can be granted up to £30,000 of options, by reference to the market value (ignoring the effect of any relevant restrictions) of the underlying shares at the time of grant. Where this limit is exceeded, the CSOP tax benefits are not available.

The Chancellor has now announced that the current £30,000 limit which has been in place since the establishment of CSOPs 27 years ago, will double to £60,000 from April 2023, increasing the generosity and availability of this scheme. In addition, there will be a relaxation of the CSOP rules on share classes, details of which are awaited, but which should make it much easier for companies to qualify.

Other business tax measures

Investment Zones - tax advantages

A keystone policy of the Truss campaign, the Chancellor confirmed today that so-called 'Investment Zones' will come with unique tax advantages for businesses that operate within these zones. The aim is to promote economic growth and development by encouraging private sector investment through tax incentives and liberalised planning laws. Appendix A of the 'Growth Plan 2022' (available  here) sets out a list of interested areas (illustrative sites with potential for growth and local authorities the Government is in early discussions with).

• Business rates – newly occupied business premises will qualify for a 100 per cent relief on business rates. This may extend to existing businesses where they 'expand' within the Investment Zone site.
• National Insurance – employers will pay zero rate NICs for employees that work in Investment Zones for at least 60 per cent of their time. This will apply for employee salaries up to £50,720, above which regular NICs rates will apply.
• Stamp Duty Land Tax – land and buildings bought for commercial purposes, including the development of residential projects, will qualify for a full Stamp Duty Land Tax relief. It should be noted that this policy applies specifically to Investment Zones and is separate to the more general changes in Stamp Duty Land Tax thresholds for individual purchasers of residential property.
• Capital allowances – businesses that set up in Investment Zones will qualify for 100 per cent first year capital allowances on qualifying plant and machinery expenditure.
• Structures and buildings allowance – businesses will be able to reduce their taxable profits by 20 per cent each year to offset the cost of qualifying non-residential property investment. In practice, this means that businesses will be able to offset 100 per cent of their investment costs over 5 years.

It should be noted that these tax incentives are currently proposed to be 'time-limited' over 10 years.

Capital allowance - annual investment allowance (AIA)

The Chancellor announced today that the AIA (under which businesses can claim capital allowances on plants and machinery expenditure) will remain at £1 million permanently.

The AIA had been increased to £1 million as a temporary measure, and it was expected to revert to the old limit of £200,000 after 31 March 2023. The fact that it has now been made permanent suggests the Government's willingness to promote capital expenditure and private sector investment.

Research & Development (R&D) reform

In 2021 the Government launched a review of the Research and Development (R&D) tax reliefs. Since then, it has announced several reforms such as bringing pure mathematics research within scope of the reliefs, including data and cloud computing as new qualifying costs, and refocussing the reliefs towards innovation in the UK. The Chancellor confirmed that the Government intends to continue the R&D tax relief reform process, with any changes to be announced at a future fiscal event.

VAT-free shopping

The Government has stated that it wants to promote the development of the retail and tourism sector through the introduction of a new VAT-free shopping scheme for foreign visitors. Upon leaving the UK, tourists will be able to obtain a full VAT refund for goods purchased within the UK.

It is intended that this will encourage higher spending, which will boost the sector, create more jobs and benefit the high street. The new scheme would function digitally, although the final design of the scheme will be subject to a consultation, with no current timeframe in place.

Reversal of previous IR35 reforms

Initially introduced by Gordon Brown in 1999, IR35, or otherwise known as off payroll-working rules, refers to tax legislation that was introduced to counter a form of tax avoidance where the services of individuals who would otherwise be employed are provided through an intermediary, such as a personal service company. Left unchallenged, this type of arrangement would typically result in a lower tax burden (in particular with regard to NICs). Where IR35 applies, additional employment tax liabilities are imposed. Prior to the reforms referred to below, responsibility for assessing the individual's employment status and complying with IR35 rested with the intermediary (and the individual behind it).

2017 saw a reform of the IR35 rules for the public sector, which shifted responsibility for assessing an individual's employment status and complying with IR35 to public bodies employing third-party contractors through an intermediary. In 2021, this reform was extended to the private sector, with those responsibilities shifting from the intermediary to the fee-paying party, often being the end client or recruitment agency. The reforms have been unpopular and are reported to have resulted in a shortage of contractors in certain sectors.

The Chancellor has now announced a repeal of the 2017 and 2021 reforms to IR35, with effect from 6 April 2023. The repeal will result in a move back to the original off-payroll working rules, meaning workers (through their intermediaries) are once again responsible for determining their employment status and paying the appropriate amount of tax and NICs. This reduces complexity for businesses which will no longer be required to determine the employment status of contractors engaged through an intermediary.

The Chancellor has also hinted at a review of IR35 itself, which remains a complex set of rules that have not been consistently applied since their conception.

No further windfall tax on energy companies

On 26 May 2022, an energy profits levy of 25 per cent was introduced by the then Chancellor, Rishi Sunak, to apply to profits of oil and gas companies operating in the UK and the UK Continental Shelf. This is a temporary tax which is set to be phased out when oil and gas prices go back to "more normal levels" (what those are remains subject to discussion) and will expire after 31 December 2025. Until then it increases the headline rate of tax on those companies' profits (arising on or after 26 May 2022) from 40 per cent to 65 per cent.

The energy profits levy is unaffected by today's announcements, and the new Government has effectively ruled out further windfall taxes.

Duties and miscellaneous measures

Alcohol duties

All alcohol duties will be frozen from 1 February 2023 to provide additional support for the sector.

In addition, the Government published its response to the Alcohol Duty Review consultation (previously launched at the 2021 Autumn Budget 2021) tougher with draft legislation. The proposed reforms are intended to improve the current system by making it simpler, more economically rational and less administratively burdensome on businesses. The reforms will be legislated for to come into force on 1 August 2023.

Office for Tax Simplification (OTS) to be abolished

The Government has been clear that tax simplification is a priority for achieving economic growth, yet today announced that the OTS will be abolished. The Chancellor claimed that, as an 'arms-length' separate body, the OTS has not been effective enough in its objective.

Instead, it is proposed that tax simplification should be 'embedded' into relevant government institutions – departments such as HMRC and the Treasury will be mandated to focus on and consider tax simplification in their operations. It is not yet clear how this will be done in practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.