Tax highlights from the Mini-Budget
The ICAS Tax Team outlines some of the key tax announcements from the Mini-Budget on 23 September.
Mini-Budget – The Growth Plan 2022
The Chancellor delivered a Mini-Budget – officially titled ‘The Growth Plan 2022’ on 23 September. Much of the initial reaction concentrated on the announcement of the removal of the 45% income tax rate for income above £150,000. This was of course reversed on 3 October. Now that the dust has settled, this article looks at some of the key tax changes from the Mini-Budget that are still going ahead.
Reduction of the basic rate of income tax
The previous Chancellor, in his Spring Statement earlier this year had announced that the basic rate of income tax would be reduced from 20% to 19% from April 2024. The current Chancellor has brought the reduction forward by 12 months to April 2023. The reduction will apply to the basic rate of non-savings, non-dividend income for taxpayers in England, Wales and Northern Ireland; the savings basic rate which applies to savings income for taxpayers across the UK; and the default basic rate which applies to non-savings and non-dividend income of any taxpayer that is not subject to either the main rates or the Scottish rates of income tax.
For Scottish taxpayers, the Scottish government sets income tax rates for non-savings non-dividend income. In 2022-23 Scottish taxpayers earning up to £27,850 have paid less Scottish Income Tax (SIT) than their counterparts in the rest of the UK but this will no longer be the case next year, unless the Scottish Government chooses to reduce SIT rates.
In good news for charities, the Income Tax Factsheet accompanying the Mini-Budget confirmed that there would be a four-year transition period for Gift Aid relief, to maintain relief at 20% until April 2027.
NICs and the Health & Social Care Levy
In April 2022, an across the board increase to the National Insurance rates of 1.25% was implemented, following an announcement by the previous Prime Minister and Chancellor in September 2021. The 2022/23 NICs increase was intended to remain in place until 5 April 2023 and then drop back down to previous levels, being replaced thereafter by the Health & Social Care Levy (H&SCL), a new ring-fenced tax from 6 April 2023. An anticipated £12bn would be raised by the measure. A previous article provides more detail on the NICs increase and the planned H&SCL, including the effect on devolved jurisdictions.
In the Mini-Budget the current Chancellor announced that the 1.25% increase in NICs is to be reversed from 6 November 2022. The introduction of the H&SCL will also be cancelled and will not commence from April 2023.
It appears that there is no intention to reverse the changes to NICs thresholds that took effect in July 2022 (apparently intended to reduce the impact of the NICs increase on the lower paid), given that The Growth Plan 2022 noted that the government had increased the NICs Primary Threshold and Lower Profits Limit (from July 2022 onwards), to align the point at which people start to pay NICs with income tax, at £12,570. ICAS supports simplification of the tax system – and alignment of the thresholds does simplify the rules.
Alongside the increase in the NICs rates, dividend tax rates increased by 1.25% from April 2022. The Mini-Budget confirmed that this will also be reversed from April 2023 .
As had been widely expected, the Chancellor announced that the planned increase in the main rate of Corporation Tax to 25% in April 2023 is being cancelled. The existing 19% rate will continue to be payable from 1 April 2023 onwards.
The previously announced Corporation Tax increase would have affected all companies with a taxable profit above £50,000 as an effective marginal rate of 26.5% would have applied on profits between £50,000 and £250,000, with the 25% main rate applying thereafter. Whilst the government has stated that 70% of active trading companies would normally have taxable profits below £50,000, it is important to bear in mind that the £50,000 and £250,000 limits would be divided between associated companies, in essence companies under common control. So, the additional rate could have impacted a significant number of companies in the UK as the £50,000 and £250,000 limits would be divided by companies under common control.
Maintaining the single 19% rate, aside from the cash flow benefits for companies, will reduce the complexity for Corporation Tax computations that the introduction to the 25% rate would have brought. Whilst the legislation to confirm this will need to be reviewed in due course, the expectation is that the reintroduction of the associated companies rules will no longer happen, which will simplify Corporation Tax computations for tax practitioners and would mean that only group companies should need to be considered for Quarterly Instalment Payment purposes.
Retaining the 19% rate could result in some businesses reconsidering whether it would be appropriate for them to operate as a limited company as opposed to an unincorporated business. There is no ‘one size fits all’ answer to this question, as this will depend on the level of profits of a business and the need for the owners to extract cash from the business.
Annual Investment Allowance
Annual Investment Allowance (AIA) was introduced in 2008 to provide a 100% tax deduction for expenditure on qualifying capital expenditure in the year of purchase, the most notable exception being expenditure on cars. Prior to the Chancellor’s statement, the AIA limit was expected to reduce from the ‘temporary’ £1 million to the previous ‘permanent’ £200,000 at the end of March 2023 – but the Chancellor announced a new ‘permanent’ level of £1 million. Companies may have been able to take advantage of the 130% super deduction since April 2021 (although not for used or some leased assets), but AIA has remained the only route over the last few years for unincorporated businesses to receive any element of upfront tax relief on qualifying additions in the year of purchase.
Businesses with an accounting year end other than 31 March 2023 would have been expected to apply transitional rules to calculate the AIA limit for a particular period straddling 31 March 2023. Using the example of a business with a 30 June 2023 year end, the maximum AIA limit for the year would be £800,548 (being 274 days at £1 million plus 91 days at £200,000), although the maximum for a particular business would depend on the timing of expenditure. If that business had bought a £700,000 used machine in September 2021, full AIA would have been available. Whereas, under the transitional rules, only £49,863 of AIA would have been available if the same machine was bought in May 2023 (being the 91 days at £200,000).
Making the £1 million limit permanent, will avoid the need to apply AIA transitional rules, which may accelerate the AIA available for qualifying plant and machinery expenditure in the coming months as it will no longer matter whether the expenditure has been incurred before 31 March 2023. This will simplify tax computations and will also be helpful for businesses in terms of giving them certainty over the allowances that may be available in respect of any planned capital expenditure. It will also be beneficial to businesses with long lead times for the delivery of assets, as adherence to the 31 March 2023 deadline will no longer be an issue.
Maintaining the £1 million AIA limit will mean that the vast majority of UK businesses should receive up front tax relief on all their qualifying expenditure. Nevertheless, it should be borne in mind that claiming AIA can give rise to balancing charges when assets are sold in future, and this is something that tax practitioners should be mindful of when advising their clients.
Off-payroll working reforms
Those working in the contracting sector who provide their services though a corporate intermediary once again find themselves in the spotlight, after the Chancellor announced that the “off-payroll working” changes which were brought into the public sector in 2017 and into the private sector in 2021 are being repealed from April 2023.
The legislation to implement the changes will need to be reviewed in due course, but it is expected that Chapter 10 ITEPA 2003 will be repealed and Chapter 8 ITEPA 2003 will be amended so that the position will largely revert to the old version of the intermediaries' legislation (commonly known as IR35) before the 2017 and 2021 changes came into effect.
There has been some jubilation in the contractor community about the announcement, but it is important not to lose sight of the fact that contractors will have some important issues to consider as a result of the reversion to the old ‘IR35’ rules:
- Contractors working through intermediaries will now be responsible once again for determining their own tax position in relation to the work they perform for each client;
- Their professional indemnity insurance position might change as a result;
- HMRC may pay close attention to status determinations made by end-user clients between 2017/18 and 2022/23 inclusive and compare them to the post-repeal position – questioning why they are different if the work being done is the same;
- Some contractors who are employed by their end-user may stay that way, whilst others may be let go – but care needs to be taken about the accrual of employment rights position;
- Businesses must be careful not to fall foul of the Corporate Criminal Offence legislation if they dismiss employee contractors and re-engage them as independent contractors.
The thorny issue of employment status has not gone away, and is still likely to be prevalent in the courts and tribunals system, but there is no prospect of changes on the horizon following the recent response to the 2018 employment status consultation by BEIS.
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