The Chancellor of the Exchequer, Rishi Sunak, presented his Spring Statement in Parliament yesterday and whilst sparse when compared to previous statements, he made some key announcements that impact both individuals and businesses immediately and in the not-too-distant future.
A summary of the key announcements (together with pre-existing announcements) made were:
- The increase in the living wage from April 2022 to £9.50 per hour (Currently £8.91).
- Changes to Universal Credit to benefit low-income families.
- Assistance with household energy bills and council tax rebates (Houses in Council Tax Bands A – D).
- Alignment of the Primary Threshold and Lower Profits Limits for National Insurance with the personal tax allowance to £12,570. Which will save around £330 per year.
- A reduction to fuel duty which will be cut by 5 pence per litre (from 6pm on the 23rd March 2022) until the 31st March 2023.
- Increasing the Employment allowance from £4,000 to £5,000 per annum for employers.
- A proposed reform to how tax relief is obtained from Capital Expenditure when businesses are investing in capital assets.
- A review of employee training and review of the Apprenticeship Levy, to see if it's achieving the effects it was designed to encourage.
- A review of the Research and Development Tax relief regime in the UK with a view to consulting on whether this needs further reform to improve and prevent abuse.
- A reduction to the Basic Rate of Income Tax from 20% to 19% from April 2024.
- A review of current tax reliefs and to review and reform where necessary.
- A reduction in VAT to supply and installation of Energy Saving Materials
The theme to this Spring Statement was to tackle the issue of rising costs of inflation, which rose to 6.2% - a 30-year high. This is due to a combination of factors arising from Brexit, recovering from the Coronavirus Pandemic and the war in Ukraine, all at a time where government spending has been and is likely to continue to be significant to help with the situation. This is despite announcements that borrowing is forecast to come down, which is imperative it does as with interest rates rising it increases the interest that the Government pays on its borrowings.
That aside, we will cover in more detail some of the announcements that were announced today from a tax related viewpoint.
The proposed Health & Social Care Levy will still come into force from 06 April 2023 whereby 1.25% will be added to Employees (Class 1), Employers (Class 1A & 1B) & Class 4 National insurance rates and also to Dividend rates of tax. This was to generate an additional £12bn pounds per year.
Announced in the statement, the Primary Threshold and Lower Profits Limits for National Insurance will be increased from July 2022 on parity with the personal tax allowance to £12,570. This is a saving of £330 per year for a typical employee and self-employed person and is expected to cost £6bn which is around half of what the Health and Social Care Levy is expected to generate.
It was called for this levy to be scrapped or deferred, but this is perceived to be a watering down or partial U-turn.
There are losers and it appears that not to scrap the levy would affect owner mangers who remunerate themselves via a small salary and dividends, as whilst they can now receive slightly higher salaries (up to £11,908 before Employers NIC’s kicks in) without a charge to National Insurance, dividends will still attract a 1.25% levy charge as opposed to scrapping it all together. This together with the recent IR35 reforms makes operating small businesses though a company less attractive and now the commercial arguments to incorporate are more relevant than the tax motivations.
In addition, the Employment Allowance which was £4,000 per annum, will increase to £5,000 per annum. This means that employers will not pay the first £5,000 of Employers National Insurance per annum and is not available to single director small companies. The Employment allowance was introduced in 2014 at £2,000, so this is a 150% increase in 8 years.
The main rate of Corporation Tax is set to increase from April 2023 from 19% to 25% and there was no indication today that this is to be reversed, so we will have to assume that this will go ahead from next year. The 19% rate will remain for profits below £50,000 per annum and a marginal rate of 26.5% for profits between £50,000 & £250,000.
To deter businesses from deferring capital expenditure until the new rates are introduced, in 2021 the chancellor announced two specific capital stimulus measures:
- The Super-Deduction – A measure to provide 130% first-year relief on qualifying main rate plant and machinery investments until 31 March 2023 for companies
- The 50% first-year allowance (FYA) for special rate items until 31 March 2023 for companies
The effective rate of relief under the Super-Deduction when scrutinised is 24.7% (19% multiplied by 130%) which in effects brings forward tax relief now for businesses rather than deferring to 2023.
The Annual Investment Allowance (‘AIA’) will continue to be available alongside the new measures and the AIA will remain at £1m to 31 March 2023. Thereafter, the AIA is expected to fall to only £200,000.
A consultation is to be launched to ensure that expenditure does not drop off a cliff from April 2023 so that tax relief for capital expenditure is still attractive to allow for businesses to invest and receive tax incentives in doing so.
The current regime has become fragmented and is largely dictated by case law so we would expect it will also be used to simplify matters and tighten up on other areas. The current rules for Plant and Machinery were last substantially modified in 2009 when also the category of Special Rate Items was introduced. More recently we have seen the introduction of Structural Buildings Allowances and allowances for Freeports which were largely introduced to deal with the black hole left when the Industrial Buildings Allowances were phased out 14 years ago.
It will be interesting to see if there is a complete reform or substantial modifications to the rules, but we expect not to return to a £200,000 AIA in March 2023 as that would deter Investment.
Research and Development
These reliefs are some of the most generous reliefs available to businesses and are worth between 11p (Large companies) and up to 33p (Small companies) for every £1 spent on qualifying projects.
The work that qualifies for R&D relief must be part of a specific project to make an advance in science or technology and can cover a variety of businesses and sectors from food & agriculture to pharmaceuticals.
The regime has been in place for around 22 years and over the years it has been modified slightly with more substantial changes in 2016 with the introduction of the R&D Expenditure Credit (‘RDEC’) for large companies.
HMRC announced in the Budget last year that certain changes will be made to allow for pure math’s to be included and for the allowance of certain cloud computing costs when undertaking R&D. Also, there will be restrictions introduced to ensure that only R&D undertaken in the UK would qualify so that the relief would remain in the UK economy.
The regime is also subject to substantial abuse and the government will consult on proposed changes to ensure it is still ‘fit for purpose’ for adapting and changing technologies and to ensure there is still a level playing field.
VAT – Energy Saving
Currently a reduced rating (5%) applies to the installation of Energy Saving Materials whereby these are installed when ‘social policy conditions’ are met (supplies to persons aged 60 or over or in receipt of certain benefits, housing associations or installations in accommodation used solely for a relevant residential purpose) "or" where the cost of the Energy Saving Materials does not exceed 60% of the total value of the supply.
If the cost of the Energy Saving Materials exceeds 60%, only the labour cost element qualifies for the reduced rate (with the materials standard rated).
This used to be more flexible, but as a result of EU infraction proceedings, the UK was required to restrict the rates of VAT that are charged in 2019.
Now that the UK has left the EU, the Government is ‘flexing its muscles’ to overturn EU decisions and setting its own rates and rules. This is starting to depart from EU rules and regulations whereby the UK is now straying from mirroring EU VAT rules.
From April 2022 the following changes have been announced:
- The relief will no longer be restricted by the social policy conditions or the 60% test, so all installations will qualify, including ‘supply only’ (Subject to detailed review of the legislation)
- Wind and water turbines will be added back to the list
- A temporary zero rate will be introduced with effect from 1 April 2022 until 31 March 2027 instead of the reduced rate and unless the government introduces further legislation to extend the period of the zero rate, the installation of such materials will revert back to the 5% reduced rate from 1 April 2027
This is a welcome change and will help the UK move to a greener economy. Some of the items that are included are:
- controls for central heating and hot water systems
- draught stripping
- solar panels
- wind turbines
- water turbines
- ground source heat pumps
- air source heat pumps
- micro combined heat and power units
- wood-fueled boilers
Finally, the ‘rabbit out of the hat’ and unexpectedly, it was also announced that from 2024 the government will cut the basic rate of income tax from 20% to 19% which equates to a £175 saving per year for 30 million workers, pensioners and savers.
Whilst a small reduction, this also is not great news for owner managers as this is a change to basic rate income tax with the dividend rate of tax set to remain the same, again tilting the balance towards PAYE salaries over dividends which is probably the longer-term objective. No changes were made to the taxable bands, which should have benefited all, which suggests the underling policy and message from the government on dividend remuneration.