In just 30 minutes, UK Chancellor Kwasi Kwarteng delivered a financial statement that reversed years of socio-centric policy. The changes will benefit the highest earners and business in a bold but untested bid to stimulate wide economic growth. In a world which has experienced unprecedented change over the last few years, this stance is a big gamble which will be unpopular with a lot of voters and could see the new Truss Government dethroned in the next election.
Following the announcement, the pound has devalued significantly relative to other currencies, reducing the cost of foreign investment into the UK. This is likely to be of interest to groups seeking to engage in M&A activity in the UK, with potential targets now more affordable from a US Dollar/Euro perspective, and we are therefore expecting an increase in activity in this area.
As promised by the Prime Minister, the proposed ‘higher rate’ of Corporation Tax of 25% from April 2023 has been cancelled to further the Government’s plan to boost investment and growth. This will be welcome news to many large corporates saving them, the Treasury say, £18.7 billion per year by 2026/27. Retaining the existing rate of 19% leaves the UK with the lowest Corporation Tax rate in the G20. This is likely to be welcomed by overseas investors, who may see it as an incentive to boost levels of investment in the UK.
Small and medium enterprises will be cheered that the threshold of the Annual Investment Allowance (AIA) will be “permanently set” at £1 million, allowing 100% capital allowances on up to £1 million of certain capital spend each year, rather than reverting to £200,000.
For large companies that have taken advantage of the 130% super-deduction, which was designed to encourage businesses not to delay capital expenditure until the 25% tax rate had been introduced, the cancellation of the 25% tax rate is a double bonus, as they have received tax relief at very nearly 25% during this time for their capital expenditure. The 130% super deduction will end in April 2023 though, as planned and this will no doubt encourage accelerated spend on certain larger capital items and projects.
Alongside these general changes to capital allowances, the Government has announced a number of time-limited (10 years) tax reliefs for businesses locating in “New Investment Zones”. This includes not only an unlimited 100% first year allowance on qualifying capital expenditure but also an enhanced Structures and Buildings Allowance (SBA) of 100% over five years. The precise details of how this latter proposal will work are yet to be announced but it represents a radical change from the norm. Outside these Investment Zones, the SBA is worth only 3% of the cost of the building.
The Company Share Option Plan (CSOP) rules are also being made more generous, including a doubling of the value of the shares under option that can be granted to employees from £30,000 to £60,000. These changes will be effective from April 2023 and are likely to be welcomed, as they make the UK more competitive in this area, and also narrow the gap between the UK CSOP and US ISO allowance of $100,000.
Finally, as the basic rate of Income Tax will be cut to 19%, this will also reduce UK withholding tax on interest and royalties to 19%, although many such payments are subject to lower rates in any event under the UK’s tax treaty network.
Personal and employment tax
The Government had already pre-announced the decision to reduce the rates of National Insurance contributions (NICs) by 1.25% in November and reverse the Health & Social Care Levy which was to be introduced in April 2023. The increase to NICs had only been in place since April 2022 and is a move that has been criticised for mostly benefitting those who are the higher earners. Due to a quirk in the way NICs are calculated, a director pays on an “annualised basis” rather than a weekly or monthly figure. As such, the increase to the NIC rate from November may actually apply retrospectively from April for these individuals. The exact detail/mechanics will need to be checked when further details are published. The 1.25% added to tax on dividends will also be reversed from April 2023 meaning that the highest taxpayers benefit from a 6.85% reduction to the headline rate of tax on their dividends.
Consistent with this theme, the Chancellor also announced that he will bring forwards the planned 1 percentage point cut to the basic rate of Income Tax by 12 months to April 2023.
It was originally announced that the additional rate of Income Tax (the headline 45% rate) would also be removed from April 2023 so that the top rate returns to 40%. However, in light of the negative attention this measure has received, the Government has since performed a U-turn and will now retain the 45% additional rate of Income Tax for someone earning over £150,000.
The cap currently applicable to banker’s bonuses will be removed so that they will no longer be limited to 100% of their fixed pay (or 200% of fixed pay with shareholder approval).
In 2017 and 2021 there were significant reforms to off-payroll working where workers provided their services via an intermediary such as a personal service company. However, from April 2023 we will revert to the old position whereby the taxpayer will need to determine their employment status in order to pay the appropriate amount of tax and National Insurance. This is a big reversal to previous policy where such arrangements were increasingly being seen as securing the individual involved an unfair tax advantage. This change is therefore clearly aimed at reinvigorating entrepreneurism and allowing individuals to benefit from their enterprise.
The above measures will increase the competitiveness of the UK from an employment perspective and reducing employment costs through the abolition of the National Insurance contributions (NIC) increase. The reversal of the off-payroll working reforms will also reduce complexity for businesses expanding into the UK.
Stamp Duty Land Tax – Investment Zones
A new Stamp Duty relief will be given for purchases of land and buildings in Investment Zones – special areas to be designated benefitting from tax incentives and “planning liberalisation”. The main condition that needs to be met for the Stamp Duty relief appears to be a commitment from the buyer to develop the land either into commercial or residential property. More detail is expected soon. The measure will be wider than freeports relief, which is limited to commercial use and instead will mimic Stamp Duty Land Tax (SDLT) disadvantaged areas relief (since abolished). Unlike many measures announced in the Mini Budget, the relief will not apply from today. However, if the experience with freeport relief is anything to go by, expect the process of designating the areas to be relatively rapid.
The combination of these measures is aimed to drive economic activity in areas of the UK and may be attractive to overseas groups investing into the UK due to the reduced costs of investments and enhanced capital allowances, along with potential additional measures to be announced in the future.
Would you like to know more?
If you would like to better understand how the Mini Budget announcement may impact your international business, please get in touch with your usual Blick Rothenberg contact or Andy Briggs or James Dolan using the details on this page.