Paul Brown, tax partner at WR Partners in Shrewsbury, described today’s autumn statement as ‘a masterclass in expectation management’. Here, he delivers his initial thoughts.
How do you get people to feel better about bad news? By making them think “well that could have been worse…”
Since he came into office the Chancellor has been sowing the seeds of terrible news on tax in his Autumn Statement. Now that we have the bad news it is clear he hopes people feel that it wasn’t as bad as it could have been.
Indeed, it seems pretty clear Mr Hunt is hoping people will not think of his measures as being tax increases at all. Fiscal drag is the term often used for pushing up tax take not by increasing rates but by freezing thresholds. Many of the tax measures reflect fiscal drag in its purest form There is no increase in the headline rates of the main taxes (quietly overlooking the previously announced increase in the corporation tax rates of course). However, plenty of people will be dragged further into the tax net over the coming years.
Personal taxes
Personal allowances and the tax bands will be frozen for a further two years until 2028 – so as wages (hopefully!) increase more will pay tax for the first time or will be tipped into higher rate bands. Similarly, as property prices increase more people will pay inheritance tax with the freezing of the nil rate band again for a further two years.
As an extension to this logic, the tax-free dividend allowance of £2,000 will reduce to £1,000 next tax year and £500 the year after. Similarly, the capital gains tax annual exemption will fall to £6,000 in 2023/24 and £3,000 the year after… So no tax rises, but as if by magic plenty of people will pay more tax.
The final income tax measure is to reduce the threshold for the 45% tax rate to £125,140 from £150,000 – oh what a contrast from the mini budget of but a few weeks ago which aimed to remove the 45% rate altogether… Why such an odd number you may ask? Simply because that is the income level at which an individual’s tax free personal allowance will have tapered to zero – a process which starts when income exceeds £100k.
In theory this would cost someone earning over £150,000 an extra £1,200 in tax per year. However, many who may now have to pay the tax rate will be business owners running their business through their own company. Because they control the amount of personal income they receive my bet is that many will simply cap the amount they take as personal income at £100,000 – so they pay tax at a top rate of 40% and keep their full personal allowance. I am not a great believer in the theory that increasing tax rates tends to reduce the tax take but on this occasion I think there may well be some truth in it.
Other measures that will affect individual will be the reversal of the cut to stamp duty land tax in England and Northern Ireland introduced in the Mini Budget. Rates will return to their previous levels from April 2025. This was one of the few measures introduced by the Chancellor’s predecessor which survived the initial round of reversals – but not for long it seems!
Those driving electric cars have benefited from significant tax advantages for some time but as these vehicles become more common they are going to be chipped away. Electric cars will be subject to vehicle excise duty from April 2025 and the benefit in kind rates will increase in future years, albeit only by 1% per year. This seemed inevitable as we transition away from internal combustion engines although the changes still mean electric vehicles are an attractive option for company car drivers.
Business taxes
From a business tax point of view the key measure affecting most will be the reform to the R&D tax credit system. In response to much publicised abuse of the system the Chancellor has responded by cutting the benefits for Small and Medium Sized entities. The current enhanced rate of deductions is 130% of qualifying expenditure – this will fall to 86% while the repayable tax credit will decrease from 14% of qualifying spend to 10%. The changes apply from April 2023.
There is no doubt there has been abuse of the system and a few bad apples have spoiled the barrel for everyone else. However surely the answer was not to cut the credit but to police it better and stop the abuse in the first place. This hardly chimes with innovation being one of the Chancellor’s pillars of a return to growth. The one bright spot is that the scheme for larger companies will see the expenditure credit available increase from 13% to 20% - clearly it is only SMEs that abuse the system, at least in the Chancellor’s mind…
The other business tax measure which directly impacts a few but may have broader repercussions is the increase and broadening of the windfall tax on energy companies which is slated to raise £14 billion next year. A cynic might suggest at some point those companies will find a way to recoup that cost from consumers, but of course I would never be that person…
What wasn’t there?
As ever this is caveated by the fact that the “devil is in the detail” and measures often emerge in the days following the announcement. However, based on what has been published at the time of writing Business Asset Disposal Relief (the tax break formerly known as Entrepreneur’s Relief) seems to have survived, as does higher rate relief for pension contributions and the various inheritance reliefs for agricultural and business property. Notably there do not appear to be any changes to the non-dom tax rules either but I never thought that was likely at this stage of the game.
All were subject of much speculation before the announcement – not by me I hasten to add as even I have learned that making predictions is a bit of a fool’s game in such uncertain times!
Final thoughts
When is a tax rise not a tax rise? It is an exercise in semantics but, windfall taxes and a few other detail changes the Chancellor did not actually raise tax rates at all in his statement. However, by subtle (well OK, not very subtle) means he has managed to bring more people into the tax system and increased the tax those already in the system will pay. Equally much of the pain is deferred over the coming years rather than kicking in immediately.
As a result many may feel that is really could have been worse but most if not all will pay more, it will just be drip fed through over time and in less obvious ways. To that extent you could argue the Chancellor’s expectation management campaign may well have succeeded – at least for now…
Shropshire Chamber response
Shropshire Chamber of Commerce says it hopes today’s autumn statement will inject a ‘period of stability’ into the economy – but warned that many businesses will still be pushed close to financial breaking point in the coming months.
Chancellor Jeremy Hunt presented an autumn statement which included £30 billion of spending cuts and around £24 billion in tax rises over the next five years.
The announcements were in stark contrast to Kwasi Kwarteng’s ill-fated plan for £45 billion of tax cuts which sent the markets into a frenzy less than two months ago.
The Office for Budget Responsibility has forecast that the UK economy will shrink by 1.4% next year - but it also expects the UK’s inflation rate to fall to 7.4% next year, from a peak of 9.1% in 2022.
Richard Sheehan, chief executive of Shropshire Chamber, said: “After all the chaos and uncertainty of this summer, we desperately need a period of stability.
“Shropshire businesses require a clear plan to boost investment and growth, and targeted measures that ease the specific causes of inflation.
“Early evidence from the financial markets suggest that the Chancellor has largely succeeded in reassuring investors in the immediate term, but we know there are many bumps along the road which are heading our way.
“The Government talks about growth but there was little recognition of the need for companies to retain their workforces to spearhead that growth.
“We need a clear understanding of what companies are going to receive in terms of support for energy bills going forward. Without this, we know that many employers will be forced into consulting with staff over potential redundancies.
“We welcome the rise in the national living wage, but yet again, this is a tax on businesses who have to foot the bill. And we look forward to the long-promised review of business rates – even though it seems to be no further forward.”
Mr Sheehan added: “Recession, coupled with runaway inflation, is a lethal combination. Our surveys show that confidence is falling fast among businesses which are finding it impossible to absorb or pass on rising costs.”
The British Chambers of Commerce has described the Bank of England’s use of interest rate rises to control inflation as a ‘blunt instrument that fails to address the core drivers of inflation for most firms’ - soaring energy costs, global supply chain disruption, and rising staff costs due to ongoing labour shortages.
Mr Sheehan added: “Businesses are already expressing their disappointment in the decision to remove exemption from road tax for electric cars, fearing it will prevent the Government from hitting its ambitious Net Zero targets.”
Shevaun Haviland, director general of the BCC, said: “The Chancellor has stayed true to his word in focusing on financial stability and targeting support for the most vulnerable in society. But in the teeth of a recession, this statement will not increase business confidence.
“Businesses will look at today’s announcements and welcome support with business rates, and retention of the employment allowance, though the reduction in the dividend allowance will impact many smaller firms.
“The Government must do more to improve conditions for businesses to invest and grow, otherwise we will be starting from a weak base to power our recovery once global economic conditions stabilise.
“The Chancellor’s statement is light on green innovation, doesn’t address current labour shortages and has nothing on boosting export led-growth.”
SOME HEADLINES FROM THE AUTUMN STATEMENT
WHAT OTHER BUSINESSES ARE SAYING:
SMEs who are making a profit could previously claim tax relief on the full amount of their qualifying research and development activities plus an additional 130%. It was confirmed in the Autumn Budget today that this ‘deduction rate’ will decrease to 86% from April 2023. The amount businesses can claim will also be impacted by the rise in corporation tax from 19% to 25%, set to happen at the same time.
In real terms, this means companies who can currently claim tax back on up to £230 per £100 of R&D activity they undertake, will from next spring be claiming for £186 per £100 spent.
Mark Evans of R&D Tax Claims in Shrewsbury, said: “We are relieved to see the scheme has not been cut entirely, which was the fear of some commentators before the Autumn Budget was announced. While it’s better news for larger firms than SMEs which is not what we hoped for, there does seems to be a willingness to work with SMEs before further changes are made.
“So, I’d wholeheartedly encourage not only my clients but any businesses who undertake R&D to actively engage with any consultations and feedback opportunities. We must make it clear to the Government how central these R&D activities are to their vision of the UK as a ‘superpower’ when it comes to innovation and progress.
“Ridding the industry of advisers encouraging misuse of the system is imperative. But it’s a truly sad day for British enterprise if - by doing so - we financially disadvantage those businesses who are undertaking legitimate R&D and are advancing industry, pioneering new ideas, and leading the way.”
Debbie Price, chief executive of Shropshire's not-for-profit care provider Coverage Care Services, said the Chancellor’s £8 billion investment in health and social care services was very much needed but warned that urgent efforts were needed nationally to help tackle the mounting recruitment challenges facing the sector.
She said: “Across the care sector and health profession nationally it’s becoming increasingly harder to attract new recruits and retain existing staff. The challenges of the pandemic have taken their toll on the workforce in general and we are fighting an uphill struggle when it comes to promoting health and social care as a career of choice to people.
“It’s a serious issue which needs addressing urgently if care homes up and down the UK are to be expected to support the NHS and help free up thousands of hospital beds through community discharge.”
National chair of the Federation of Small Businesses (FSB), Martin McTague, said: "The Budget is high on stealth-creation and low on wealth-creation, piling more pressure on the UK’s 5.5 million small businesses, their employees and customers.
"While tackling inflation is essential, so are measures to create conditions for prosperity, growth and support enterprise. Today is a missed opportunity to avoid further economic slowdown. Small businesses, which account for more than 16 million jobs in the UK, were already facing an acute cost of doing business crisis through soaring costs, falling revenues, shrinking availability of affordable finance, and a rise in invoices being paid late. On top of all that, they now face even higher taxes, cuts to innovation, and a recipe for a longer and deeper recession."
Sonia Roberts, chief executive of supported employment and training charity Landau, welcomed the Chancellor’s commitment to getting more people into work but warned that many projects which currently supported those furthest from the job market were at risk of losing vital funding.
She said: “Each year at Landau we support thousands of vulnerable individuals to gain the skills and confidence they need for sustainable employment. We do this through various funded projects working in partnership with multiple organisations. However, vital funding for many of these schemes is due to end in March next year and, as yet, the Government is still to confirm how funding will be distributed through the new UK Prosperity Fund.
“While we welcome the Chancellor’s pledge to support the unemployed, what we really need is some firm decisions by central and local Government on the level of funding that might be available so that we can continue to deliver life-changing projects and get people into work. As the cost of living crisis continues to impact, we need to be ensuring as many people as possible can secure employment and, without this commitment from government, we run the risk of alienating further those within our community who are economically inactive and who are already hard to reach.”
Neil Lloyd, managing director of Shropshire law firm FBC Manby Bowdler, said the combination of tax rises and spending cuts would inevitably have a chilling effect on the economy at a time when the business community was already facing severe pressure from the global energy crisis, rising inflation, the contraction of the economy and recruitment issues.
“The attempt to reintroduce stability to the nation’s finances is welcome, and there are some measures in the Chancellor's statement we would applaud.
“But the consistent message we have been getting from our clients is that the soaring cost of energy is an issue which must be addressed and we had hoped to hear more about how businesses will be supported when the current scheme ends in April."
Mandy Thorn MBE, chair of the Marches Local Enterprise Partnership, said: “The Chancellor was in an almost impossible situation and his Autumn Statement today certainly reflected that.
“I very much hope this package brings the stability we need and welcome the move to confirm that we are keeping to our target to cut emissions by 68 per cent over the next seven years and the focus on energy efficiency and independence.
“This very much reflects our own priorities, with the upcoming launch of the Marches Energy Grant specifically designed to help companies reduce their own energy costs and emissions. This forms part of our £4 million Marches Energy Fund programme to help safeguard the region’s energy security.
“But we need to hear more about what help the Government plans to give businesses with energy costs when the current scheme ends in April."
