UK Tax: 2022 Government Growth Plan Announcement
September 23, 2022
The announcements made on 23 September 2022 were superseded by further announcements on 3 October, 14 October, 17 October and 17 November 2022, and therefore the content on this page may no longer be correct. We recommend consulting with one of the FTI Consulting Tax team should you have any questions or would like to discuss the latest position.
With a recession looming, growth was the focus of new Chancellor Kwasi Kwarteng’s first fiscal statement this morning. What was billed as a fiscal event was more akin to a traditional Budget, with a raft of measures aimed at incentivising investment being announced.
Corporation Tax Rates
As had been widely expected, the planned increase in the Corporation Tax rate from 19% to 25% from April 2023 has been cancelled. In line with the cancellation of the increase in the Corporation Tax rate, the Diverted Profits Tax rate will remain at 25% from April 2023 such that the rate differential remains constant.
Additionally, the reduction of the Bank Corporation Tax Surcharge from 8% to 3% has been cancelled, although the increase in the Bank Corporation Tax Surcharge allowance from £25m to £100m will still take place. As a result, the combined tax rate paid by banks will remain at 27% rather than increasing to 28%.
This measure is intended to enhance the UK’s competitiveness globally and incentivise investment into the UK. Whilst previous Corporation Tax rate reductions have achieved this aim, as businesses battle inflationary pressures it is unclear whether the intended boost to investment will materialise.
Although the measure is effective from April 2023, company balance sheets will be impacted in advance of this as deferred tax balances will need to be restated once the enabling legislation has been substantively enacted.
Changes to the Capital Allowances Regime
To encourage investment in capital assets, further changes to the capital allowances regime have been announced:
- The Annual Investment Allowance will be permanently retained at £1m from April 2023.
- Refinements will be made to the super-deduction regime in consequence of the Corporation Tax rate being retained at 19% from 1 April 2023. Further details are to follow.
- Enhanced capital allowances for qualifying expenditure in tax areas of Investment Zones (see below).
The AIA announcement will be welcomed by many small and medium-sized businesses who typically spend less than £1m per annum on plant and machinery. Hopefully there will now be some permanence to an incentive that has been set at temporary levels for the majority of the time since its introduction.
It is expected that changes to the super-deduction rules could result in enhanced and accelerated tax relief continuing to be available at a rate of 130%, instead of a reduced rate applying, for qualifying expenditure incurred before 31 March 2023 within chargeable periods ending after 31 March 2023.
Announcements have not been made advising if the temporary first year allowances of the 130% super-deduction and the 50% Special Rate Allowance will continue for qualifying expenditure incurred after 31 March 2023.
The Government has announced that it intends to introduce a series of Investment Zones across the UK (identifying 24 illustrative sites and 38 local authorities with which it is in dialogue) with the aim of driving growth and unlocking housing in these areas. In addition to non-tax benefits, for a period of 10 years Investment Zones will benefit from:
- 100% relief from business rates on newly occupied business premises and certain existing businesses where they expand in English Investment Zone tax sites;
- A 100% first year allowance for qualifying expenditure on plant and machinery;
- An enhanced 20% structures and buildings allowance;
- 0% Employer National Insurance on salaries of any new employee working in the Zone for at least 60% of their time on earnings up to the higher rate Income Tax threshold of £50,270 per annum; and
- A full Stamp Duty Land Tax relief for land and buildings acquired for use or development for commercial purposes and for purchase of land or buildings for new residential development.
The detail concerning the new tax incentives for Investment Zones will be made available in due course and this will be crucial in determining their effectiveness. Enhanced tax regimes for targeted areas of the UK are not new and there are questions around the effectiveness of previous Enterprise Zones and Disadvantaged Area schemes. Furthermore, it is unclear what the introduction of the new Investment Zones will mean for Freeports, the first of which only became operational in November 2021.
UK Withholding Tax, which applies to property income distributions (PIDs) paid by UK REITs and PAIFs, and royalties and interest paid by companies, is linked to the basic rate of Income Tax. With the basic rate of Income Tax being reduced from 20% to 19% from April 2023, the rate of withholding will reduce accordingly.
The reduction in the rate of Withholding Tax is likely to have limited impact. However, following a raft of tax changes in recent years that have enhanced the attractiveness of UK REITs, a reduction in the rate of Withholding Tax payable on PIDs should further improve REITs’ appeal, although this will be somewhat tempered by the alignment of the rate of Corporation Tax paid by companies at 19% from April 2023.
Abolition of the Office of Tax Simplification (OTS)
The OTS, which was introduced in 2010 with a mandate of simplifying the UK tax system, will be abolished. Responsibility for tax simplification will pass to HMRC and HM Treasury.
It is unclear whether the abolition of the OTS will have a significant impact as the key factor in achieving tax simplification is the Government’s willingness to adopt simplification measures.
Income Tax, Employment and Reward
Abolition of the Off-Payroll Working Rules
The off-payroll working rules (widely referred to as IR35) that were implemented in April 2017 (in the public sector) and April 2021 (in the private sector for all but the smallest companies) will be abolished from 6 April 2023.
This means that end users (e.g., employers) will no longer have to determine whether an individual should be treated as employed or self-employed for tax purposes where they engage through certain intermediaries (most commonly a personal services company). The contracting personal services company will remain responsible for applying the previous IR35 rules itself.
This measure will significantly reduce the administrative burden for employers and remove a large amount of uncertainty – it is likely to be widely welcomed. However, when the measures were initially introduced the Government’s own estimation was that up to 80% of contractors were failing to correctly apply the IR35 rules and it was highlighted that HMRC did not have the necessary resources to police this – it will be interesting to see what moves are made to ensure that widespread non-compliance does not return.
Reduction in Income Tax and National Insurance Contributions Rates
From 6 November 2022 rates of National Insurance Contributions (“NICs”) will reduce by 1.25 percentage points. The planned introduction of the Health and Social Care Levy from 6 April 2023 has been scrapped. This means that NICs rates will return to their level as at 5 April 2022 (broadly meaning that employer NICs are payable at 13.8% and employee NICs at 12% and 2% depending on the level of earnings).
The basic rate of Income Tax will be reduced by 1 percentage point from 20% to 19% from 6 April 2023.
The additional rate of Income Tax (currently 45%, and 39.35% on dividends) will be abolished from 6 April 2023. This means that the top rate of Income Tax (the higher rate) will be 40%, and 32.5% on dividends.
Employees are likely to welcome a reduction in their overall tax bill (with the reduction in NICs and the basic rate band) clearly benefitting all but the lowest paid employees. The key question is whether these changes, combined with announced changes to the benefits system, will be enough to encourage people back to work.
The reduction of employer NICs will ease the financial burden on employers and will be widely welcomed. For the current tax year it will be important for employers to remember that a blended Class 1A and Class 1B employer NICs rate will apply (for the purposes of P11Ds and the PSA).
There has been no announced change to the personal allowance taper (whereby for every £2 of earnings above £100,000 an individual’s personal allowance, effectively a nil-rate band, is reduced by £1). This means that, although the notional top rate of Income Tax will be the 40% higher rate of tax, those with earnings between £100,000 and £125,140 will have a marginal tax rate of 60% - potentially a significant disincentive for some.
Company Share Option Plan (“CSOP”)
From 6 April 2023 the individual limit for employee options under this tax advantaged employee share option scheme will double to £60,000 (from the current £30,000). This means that qualifying companies can grant share options over shares with a market value of £60,000 per employee at the time of grant.
The tax advantaged nature of the CSOP, together with its discretionary nature, makes it very attractive to qualifying companies. The significant increase in the value of shares over which options may be granted is likely to be attractive for employers seeking to recruit and retain management and key staff. As always, it will be important to ensure that all the qualifying conditions are met, that all reporting requirements are complied with and, crucially, that employees understand the value of their share options.
Stamp Duty Land Tax Rates and Thresholds
From today (23 September 2022), the threshold at which Stamp Duty Land Tax (SDLT) must be paid on the purchase of residential properties will increase from £125,000 to £250,000.
SDLT applies to property in England and Northern Ireland but it is anticipated that similar changes may be made to Land and Buildings Transaction Tax in Scotland and Land Transaction Tax in Wales.
In addition, SDLT First Time Buyers’ Relief will be made more generous. From today, the relief will be available for acquisitions costing up to £625,000 (up from £500,000), with no SDLT payable on the first £425,000 (up from £300,000) of chargeable consideration and 5% payable between £425,000 and £625,000.
Rates for non-residential property are unchanged.
Aside from the benefits to individuals purchasing residential property (a reduction of £2,500 in most cases), these measures may also provide relief to certain business investing in such property. For example, acquisitions of Private Rented Sector (PRS) portfolios may now be more likely to benefit from the lower amount of SDLT applicable to purchases qualifying for Multiple Dwellings Relief, which in some cases reduces the SDLT liability from just under 5% to a charge as low as 1% (2% if the non-resident surcharge applies). Similarly, acquisitions of purpose-built student accommodation (PBSA) may now have a lower blended SDLT rate.