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Chancellor Kwasi Kwarteng Plummeting the Pound

The not-so-mini budget!

Last Friday Chancellor Kwasi Kwarteng announced a series of tax cuts and economic measures he claimed will stimulate the UK economy by boosting growth. The chancellor’s plans are part of a planned massive shake-up of the UK’s finances; but the million-dollar question is, will it work?

The Chancellor is a big fan of simplifying the tax system and he has ordered Treasury officials to focus on simplifying the tax code and as a result, he is abolishing the Office for Tax Simplification.

This mini-Budget included two big simplifications for businesses, both of which will apply from April 2023:

  • Removal of the off-payroll working rules for private and public sector
  • Scrapping two new corporation tax rates plus marginal relief

Kami-Kwasi Budget: Off-payroll working rules scrapped

From April 2023, we will be back to the IR35 rules as they were introduced in 2000, with the off-payroll working variants for the public sector and for large private sector organisations to be scrapped. The IR35 provisions will still exist, however, but it will be up to the directors of intermediary companies to decide whether there would be an employment relationship between the worker and the engager.

This was a surprise as the off-payroll rules were introduced because HMRC was unable to adequately police the original version of IR35, and the cost of non-compliance was estimated to be £1.2bn per year. The chancellor said compliance will be kept under review, and he estimates that the revenue lost per year from this change will be £1.1 bn in 2023/24.

Kami-Kwasi Budget: Corporation tax frozen & Marginal Relief scrapped

As expected, the Chancellor confirmed that the planned increase in the main rate of corporation tax (CT) to 25% will not now happen, with the main rate of CT remaining at 19% for all companies. His predecessor Rishi Sunak had planned to increase the CT rates on annual profits of over £250,000 to 25%. Those with annual profits of less than £50,000 would continue to pay CT at 19%, but marginal relief would apply between £50,000 and £250,000, giving an effective tax rate of 26.5% on those profits.

Keeping corporation tax at 19% for all companies will certainly simplify CT and according to Mr Kwarteng, this tax policy reversal will encourage private sector investment in the UK and a Treasury Factsheet provided a list of four research papers that support this theory. However, the Institute for Public Policy Research (IPPR) argues there is no correlation between corporate investment and lower tax corporate rates in any of the other OECD countries.

Kami-Kwasi Budget: Investment boost

The Enterprise Investment Scheme (EIS), which provides tax incentives for individuals to subscribe for shares in unquoted trading companies, was due to end in 2025. This scheme will now be extended for an indefinite period. The similar seed enterprise investment scheme (SEIS) which provides tax relief for investment in small trading companies is not due to expire, but the annual investment caps of £100,000 per investor and £150,000 per company will be significantly increased from April 2023.

The Annual Investment Allowance (AIA) which provides a 100% tax deduction for up to £1m of plant and machinery purchased in a year, was due to reduce to £200,000 on 1st April 2023 but will now be kept at £1m indefinitely and the rates of super deductions will also be maintained at 19%.

Additionally, employees who can currently be given share options with a market value not exceeding £30,000 under the company share option plan scheme, will see the cap doubled to £60,000 from 6th April 2023.

Kami-Kwasi Budget: What other measures were announced?

Today’s Blog is primarily about business, with the various measures aimed at the individual, such as the abolition of the planned National Insurance hike (Health and Social Care Levy), the reversed of the planned increases to dividend tax rates and the scrapping of the 45% top rate, already discussed ad nauseum.

Accountant’s view

When entrepreneurs are asked what would help them grow their business, most will mention stability in tax and economic policies in order to provide certainty when planning. Three chancellors and three changes in NIC rates and thresholds within a year does not provide either certainty or stability.

How can anyone who directly or indirectly imports goods or services plan for the future, even short-term, when Kwasi Kwarteng’s planned measures are directly responsible for a huge increase in government borrowing, which can only get worse because of the rapidly rising interest rates.

The world at large, would appear to agree with me as the pound has now sunk to almost parity with the dollar, levels not seen for 50 years or more!