September 26, 2022
UK Government presents mini-Budget and Growth Plan
On 23 September 2022, the United Kingdom (UK) Chancellor, Kwasi Kwarteng delivered his mini-Budget as part of his presentation of the Government's Growth Plan. The mini-Budget followed on from announcements made in the previous days on cuts in National Insurance, support for energy bills, the reset of retained European Union (EU) law and measures to tackle economic crime. The Chancellor promised to set out his medium-term plan for the public finances in due course and also promised a forecast from the Office for Budget Responsibility before the end of this year.
The Growth Plan itself contained a significant number of proposals. Some of these were widely expected (such as the decision not to raise corporation tax to 25% from April 2023 as planned, some relaxation of stamp duty land tax rates and the scrapping of the bankers' bonus cap). Some had not been forecast (such as the abolition of the 45% additional rate of income tax and the reversal of the IR35 off-payroll working reforms). There may be more information to come on the proposals as supporting papers are published over the next few days.
This Alert summarizes the key provisions of the mini-Budget and Growth Plan.
The Chancellor confirmed the cancellation of the planned increase in the corporation tax rate from 19% to 25% from 1 April 2023. It seems that the 19% rate will be confirmed in the upcoming Finance Bill, rather than using the mechanism in the Provisional Collection of Taxes Act. As the 25% rate is already enacted, unless the reversal is "substantively enacted" (IFRS/UK GAAP) or enacted (US GAAP) before a company's year-end, companies will need to assess their deferred tax positions using the higher enacted rate. If the change is substantively enacted or enacted after the year-end but before publication of financial statements, there may still be a requirement to disclose the effect of the change in rate.
If the Provisional Collection of Taxes Act mechanism is not used, then substantive enactment would occur on Third Reading of the Finance Bill. There is no set timetable for the passage of the Finance Bill and even if introduced in mid-November, there is no guarantee that Third Reading will happen before the end of December. Indeed, it seems increasingly likely that the next Finance Bill will not be introduced until 2023.
The Chancellor also confirmed that, given the cancellation of the corporation tax rate increase, the bank corporation tax surcharge will remain at 8% (rather than be reduced to 3%) with effect from April 2023. The rate for banks will therefore be held at 27%. The increase in the surcharge allowance to £100 million will however go ahead. The increase in the rate of diverted profits tax will also now not happen (so that rate will stay at 25%).
The Chancellor made no reference to the review of capital allowances from earlier this year but did confirm that the rate of Annual Investment Allowance would be retained at £1million per year permanently. There will be some changes to the super-deduction as a consequence of the corporation tax rate being retained at 19% from 1 April 2023 to ensure that the relief continues to operate as intended. The ongoing review of research and development tax reliefs will continue, with any further reforms announced as usual at a fiscal event.
Finally, the Government is proposing two measures to help companies improve access to finance and talent. First, it is expanding the Seed Enterprise Investment Scheme (SEIS) to help more UK start-ups raise higher levels of finance. From April 2023, companies will be able to raise up to £250,000 of SEIS investment, a two-thirds increase. To enable more companies to use SEIS, the gross asset limit will be increased to £350,000 and the age limit from two to three years. To support these increases, the annual investor limit will be doubled to £200,000.
Secondly, the Government is also expanding the availability and generosity of the Company Share Option Plan (CSOP) scheme. From April 2023, qualifying companies will be able to issue up to £60,000 of CSOP options to employees, double the current £30,000 limit. The "worth having" restriction on share classes within CSOP will be eased, better aligning the regime rules with the rules in the Enterprise Management Incentive regime and widening access to CSOP for growth companies.
Employment and Personal taxes
In advance of the Chancellor's mini-Budget, it was rumored that he might bring forward the proposed cut in the basic rate of income tax to 19% by one year to April 2023. This he did. But in a further development, he announced the abolition of the 45% additional rate of income tax, from April 2023, on annual taxable income above £150,000 so that there will be a single higher rate of income tax at 40% (subject to the rates of income tax set in Scotland). There is, however, nothing said about the withdrawal of the personal allowance related to taxable income over £100,000 or the recovery of the child benefit, meaning that marginal rates of tax could be higher than 40%.
This abolition of the additional rate of income tax will apply to the additional rate on non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland. The additional rate for savings and dividends and the default rates will also be removed from April 2023, and this change will apply UK-wide. As the additional rate of income tax will be removed, current additional rate taxpayers will also benefit from the Personal Savings Allowance of £500 for higher rate taxpayers.
A four-year transition period for Gift Aid relief will apply, to maintain the income tax basic rate relief at 20% until April 2027. There will also be a one-year transitional period for Relief at Source (RAS) pension schemes to permit them to continue to claim tax relief at 20%.
The most imminent change is the reversal of the National Insurance rise previously brought in from April 2022. On 22 September 2022, the Health and Social Care Levy (Repeal) Bill was introduced to Parliament. It is due to have all its remaining stages in the Commons heard on 11 October, the first day after the conference recess. In accordance with the Bill, the 1.25% National Insurance rate increase that came into effect from April 2022 will cease to have effect for earnings made after 6 November 2022, though it will still have effect for earnings made before that date. There is no specific anti-forestalling provision addressing earnings being pushed back until after 6 November 2022, though the legislation is driven by the date earnings are made and not the date they are paid. There is a blended rate for Class 1A contributions, taking account of the 1.25% increased rate for seven months.
Her Majesty's Revenue & Customs (HMRC) appreciates that the timeline for changes by 6 November is tight and that some employers may not be able to implement the changes in time. HMRC will be directing employees to their employers to correct any overpaid NICs in the first instance and the accompanying press release notes that some employees may not see the benefit of the change until December or January 2023.
There are also changes to the NICs to be paid by directors. A director who is paid annually on or after 6 November will apply a blended rate of NICs (as with Class 1A contributions). The Primary Threshold (PT) for 2022-23 for directors has also changed to £11,908 which will apply for the whole of the 2022-23 tax year. This will mean that where payroll has been run previously using the original PT for 2022-23 the increased PT will be used in later payroll calculations, and may mean that NICs overpaid in those pay periods will be offset against a future payroll. Where the director has a pro-rata annual earnings period, the annual PT of £11,908 will need to be adjusted according to the existing rules for pro-rata annual earnings periods for directors.
The increase in the dividend tax rates of 1.25%, which was brought in alongside the National Insurance rise in April 2022, will be reversed with effect from 6 April 2023. This may tempt owner-managed businesses to defer dividends until 6 April or later and have the company lend the amount of any anticipated dividends with the loan being cleared on payment of the dividend. However, this may trigger issues with the loans to participator rules in s455 CTA 2010.
The 2017 and 2021 reforms to the off-payroll working rules (also known as IR35) will be repealed from 6 April 2023. From this date, the Government notes workers across the UK providing their services via an intermediary, such as a personal service company, will once again be responsible for determining their employment status and paying the appropriate amount of tax and NICs. For services provided before 6 April 2023, the current rules will still apply, even where the payment is made on or after 6 April 2023.
There was no reference at this point to any "unfreezing" of the income tax personal allowance, the higher rate threshold, the lifetime allowance for pensions or the inheritance tax limits, though some of these may be addressed in the next Budget. There was also no mention as yet of the rumored "opt-in" system allowing all members of the same household (not just married couples) to share their full personal allowances (the current limit under the marriage allowance is £1,260).
The Chancellor has announced plans for the introduction of new investment zones ("rocket-powered" freeports) with "lower taxes, reduced planning restrictions and red tape."
Investment zones will only be chosen following a rapid expression of interest process open to everyone and after local consent is confirmed. The Government lists 38 English Local Authorities which it is in early discussions with, and the Government will liaise with the devolved administrations on creating similar zones elsewhere in the UK.
Specified sites in England will benefit from a range of time-limited tax incentives over 10 years. The tax incentives under consideration are:
Deregulation (including removing the bankers' bonus cap)
The banker's bonus cap is to be abolished. The Prudential Regulation Authority will remove the current cap which limits remuneration of certain bank staff to 100% of their fixed pay (or 200% with shareholder approval). As further details (including timing) emerge, firms impacted by the cap will need to consider their current remuneration structures especially in light of year-end bonus and salary decisions. Further regulatory reform is also promised for later in the year.
The Government will also bring forward draft regulations to remove certain performance fees from the occupational defined contribution pension charge cap, with a view to driving higher potential investment returns for savers and unlocking investment into the UK's most innovative businesses and productive assets.
The Growth Plan also refers to the new Planning and Infrastructure Bill which is designed to accelerate priority major infrastructure projects across England. There are sector-specific changes to accelerate infrastructure delivery, including: bringing onshore wind planning policy in line with other infrastructure to allow it to be deployed more easily in England; reforms to accelerate road delivery through more streamlined consent processes; and giving telecoms operators easier access to telegraph poles on private land.
The Chancellor has announced a reduction in SDLT on residential property purchases with immediate effect. From 23 September 2022, the threshold above which SDLT must be paid on the purchase of residential properties in England and Northern Ireland will rise from £125,000 to £250,000. Also from 23 September 2022, the threshold at which first-time buyers begin to pay residential SDLT will increase from £300,000 to £425,000, and the maximum value of a property on which first-time buyers relief can be claimed will also increase, from £500,000 to £625,000.
The measures apply to transactions with effective dates on and after 23 September 2022. They do not apply to Scotland or Wales which operate their own land transactions taxes.
There were no changes announced to the additional 3% surcharge or the foreign buyer's surcharge of 2%.
The Government has said it will introduce a modern, digital, value-added tax (VAT)-free shopping regime for non-UK visitors with the aim of providing a boost to the high street and creating jobs in the retail and tourism sectors. The delivery will include modernizing the regime that currently operates in Northern Ireland and introducing a new digital regime in Great Britain. A consultation will be launched to gather views on the approach and design of the regime, to be delivered as soon as possible.
The Government will freeze the alcohol duty rates for all categories from 1 February 2023 to support businesses and help consumers with the cost of living. The response to the consultation on the new alcohol duty system and draft legislation that will underpin the changes was also published on 23 September along with a consultation on some further technical issues. Policies contained within the response document include amendments to draught relief, more detail on small producer relief and detail of a transitional easement for the wine industry. The reforms will be implemented from 1 August 2023. HMRC is also running a small producer survey to enable a greater understanding of economies of scale across the industry. The survey will be open for four weeks to 21 October 2022.
The Government has said it will abolish the Office of Tax Simplification (OTS) and set a mandate to the Treasury and HMRC to focus on simplifying the tax code. As the OTS is a statutory body, the closure is expected to take effect when the next Finance Bill receives Royal Assent. The OTS still expects to publish its report on the taxation of property income in October and will continue to gather evidence on its hybrid and distance working review.
The Retained EU Law (Revocation and Reform) Bill 2022 was published on 22 September 2022 (but with no date for its second reading). Currently, retained direct EU legislation takes priority over domestic UK legislation passed prior to the end of the Brexit Transition Period when they are incompatible. The Bill is intended to reverse this order of priority, to reinstate domestic law as the highest form of law on the UK statute book. It will be particularly interesting to see what changes this brings from a VAT perspective.
The Bill will repeal the principle of supremacy of EU law from UK law by the end of 2023. It will also repeal directly effective EU law rights and obligations in UK law by the end of 2023 and abolish general principles of EU law in UK law also by the end of 2023. Finally the Bill will establish a new priority rule requiring retained direct EU legislation (RDEUL) to be interpreted and applied consistently with domestic legislation and downgrade the status of RDEUL for the purpose of amending it more easily.
The Economic Crime and Corporate Transparency Bill was also published on 22 September (with its second reading due on 13 October). The Bill includes broadening the Registrar's powers so that the Registrar becomes a more active gatekeeper over company creation and custodian of more reliable data concerning companies and other UK registered entities such as LLPs and LPs – including new powers to check, remove or decline information submitted to, or already on, the register.
The Bill will introduce identity verification requirements for all new and existing registered company directors, People with Significant Control, and those delivering documents to the Registrar. The Bill also intends to strengthen transparency requirements for limited partnerships (including Scottish limited partnerships) and enabling them to be deregistered if necessary. Finally, there are technical amendments to the Register of Overseas Entities.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United Kingdom), London
Ernst & Young LLP (United Kingdom), Manchester
Ernst & Young LLP (United Kingdom), Reading
Ernst & Young LLP (United States), UK Tax Desk, New York
Ernst & Young LLP (United States), FSO Tax Desk, New York
Ernst & Young LLP (United States), Transaction Tax Desk, New York
Ernst & Young LLP (United States), UK Tax Desk, Chicago
Ernst & Young Tax Co. (Japan), UK Tax Desk (Asia-Pacific), Tokyo