October 18, 2022
UK Chancellor reverses most of the Growth Plan tax measures
- The United Kingdom (UK) Chancellor has confirmed that the previously announced reduction in the basic income tax rate will be delayed "indefinitely."
- The Chancellor also announced that most of the other tax measures announced as part of the UK Growth Plan, which have not already begun their legislative process, would also be dropped.
- This Alert summarizes the policy reversals and highlights what proposals are still going ahead.
On 17 October 2022, the new UK Chancellor of the Exchequer, Jeremy Hunt, confirmed that the previously announced reduction in the basic income tax rate from 20% to 19% will be delayed "indefinitely," and will not come in from April 2023. He then went further stating that most of the other tax measures announced on 23 September as part of the UK Growth Plan, which have not already begun their legislative process, would also be dropped. This includes abandoning the reversal of the IR35 reforms from 2017 and 2021 and scrapping the reintroduction of a value-added tax (VAT)-free shopping scheme, neither of which had been widely touted as likely up till this point.
The Chancellor's statement acts as a "down-payment" on the Medium-Term Fiscal Plan – the Chancellor will still deliver the full Medium-Term Fiscal Plan, alongside the publication of a forecast from the Office for Budget Responsibility (OBR) on 31 October 2022. The Chancellor is expected to announce further changes to fiscal policy on 31 October to put the public finances on a sustainable footing.
The Chancellor also said there will be further difficult decisions to make in relation to spending cuts and tax, and while the Government still aims to "go for growth," growth requires confidence and stability. Government departments will be asked to find efficiencies within their budgets.
The income tax rate announcement follows the reversal of the decision on corporation tax rates on 14 October. The main UK corporation tax rate will rise to 25% from April 2023 as previously set out by Rishi Sunak. The increase in the corporation tax rate from April next year will mean that the UK will no longer have the lowest rate in the G20, and that the UK will need to rely more on offering incentives to maintain and build the investment needed for growth.
This means that only two of the major tax announcements made by Kwasi Kwarteng in the mini-Budget on 23 September 2022 remain:
- The decrease in the rate of National Insurance contributions from 6 November 2022 and cancellation of the Health and Social Care Levy from 6 April 2023. The Health and Social Care Levy (Repeal) Bill that addresses both of these aims has now passed all its Parliamentary stages and is awaiting Royal Assent to its enactment.
- The stamp duty land tax (SDLT) threshold changes, which apply to transactions with effective dates on and after 23 September 2022 (the legislation to enact this is still going through Parliament). From 23 September 2022, the threshold above which SDLT must be paid on the purchase of residential properties in England and Northern Ireland rises from £125,000 to £250,000. Also from 23 September 2022, the threshold at which first-time buyers begin to pay residential SDLT increases from £300,000 to £425,000, and the maximum value of a property on which first-time buyers' relief can be claimed also increases, from £500,000 to £625,000. The measures do not apply to Scotland or Wales which operate their own land transactions taxes (the Welsh Government subsequently announced its own changes to have effect from 10 October 2022). The resolutions to bring in the SDLT changes are due to be debated on 24 October and then the Bill will be introduced to Parliament.
However, in addition, the proposals for the Annual Investment Allowance, the Seed Enterprise Investment Scheme and the Company Share Options Plan will continue. As a reminder these are:
- Setting the rate of Annual Investment Allowance at £1million per year permanently. The ongoing review of research and development tax reliefs will continue, with any further reforms announced as usual at a fiscal event.
- Expanding the Seed Enterprise Investment Scheme (SEIS) from April 2023 by allowing companies 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.
- Expanding 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.
There was no mention of "Investment Zones" either in the announcement or the accompanying press release, suggesting that these may still be under consideration, but the detail may be subject to discussion.
Summary of policy reversals
- Cancellation of corporation tax rate increase from April 2023 – now reversed. It will rise to 25% from April 2023.
- Reduction of basic income tax rate from April 2023 – now delayed. It will remain at 20% until economic circumstances allow it to decrease.
- Abolition of 45% additional rate of income tax – now reversed.
- Cut to dividend tax rate – now reversed. An increase in the dividend tax rates of 1.25% was brought in alongside the National Insurance rise in April 2022. The National Insurance cut will go ahead but not the associated cut in dividend tax rates.
- Reversal of the off-payroll changes – cancelled. As a result, the current IR35 rules will remain in place from 6 April 2023. It may be that the Chancellor returns to this area once the economic position has stabilized. Even with the proposed repeal of the IR35 reforms from 2017 and 2021, employment status would have remained a live issue for business. As the current rules will now remain in place, it will continue to be important for businesses to give proper consideration to the engagement of contractors, to manage exposure to tax and/or employment rights risks.
- VAT-free shopping scheme for non-UK visitors to Great Britain – not to proceed.
- Alcohol duty freeze – now reversed. The next steps of the Alcohol Duty Review announced in the UK Growth Plan will continue as planned.
- It is presumed that the changes to the rate of Bank Surcharge and the diverted profits tax (DPT) will now also go ahead as originally planned from 6 April 2023 (so that the Bank Surcharge falls from 8% to 3%, with the overall rate rising from 27% to 28% and the rate of DPT increases to 31%). Neither was mentioned in the announcement on 17 October, though a press release on 14 October suggested that the Chancellor would confirm the position on the Bank Surcharge in the Medium-Term Fiscal Plan.
The other significant non-tax measure announced on 17 October is the change to the operation of the Energy Price Guarantee and the Energy Bill Relief Scheme. While these schemes will continue in place until April next year, a Treasury review will consider what measures could be put in place from April 2023. These new measures would be better targeted at those who need support. For businesses the new proposals would be intended to be targeted to help those most affected and better incentivize energy efficiency.
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