A&M Tax Advisor Update
The UK Chancellor of the Exchequer, Kwasi Kwarteng today unveiled a package of tax cuts that was anything but mini. In fact, it was the biggest package of tax cuts in 50 years. Interestingly he managed to do this outside of the normal Budget process meaning that amongst other things this fiscal event was not accompanied by the usual scrutiny of the public finances carried out by the Office for Budget Responsibility. Billed as a package for growth, it is difficult to see that he has balanced the books and at the time of writing the markets have reacted badly – the FTSE 100 is down 2% on this time yesterday and the pound has plunged to a 37 year low against the dollar. In this special edition of Tax Adviser Update, we have summarised the key measures below:
As pledged by Prime Minister Liz Truss in her leadership campaign, it was confirmed that the planned hike in corporation tax rate to 25% will no longer take place in April 2023. The rate will remain at 19% for the foreseeable future. This represents the lowest headline rate of corporate income tax in the G20. We anticipate that multinational groups with mobile income streams will need to reconsider their future tax strategies to take this into account. There will also be implications for deferred tax accounting with assets and liabilities needing to be recognised at the new rate once the increase is formally repealed.
A further measure aimed at stimulating investment was to make the temporary £1 million Annual Investment Allowance permanent. This allows businesses to immediately write off the first £1m of annual spend against their tax bill rather than defer relief over the life of the assets.
The basic rate of income tax will drop by 1% to 19% in April 2023 which is earlier than originally expected.
The big news however is the abolition of the 45% top rate of tax for higher earners (those earning above £150,000) with effect from 6 April 2023. This measure is forecast to cost the Treasury £2 billion but how much it will actually cost is very much up in the air as the government has priced in some fairly optimistic behavioural changes i.e. they are assuming that high earners will now declare more income.
The last time there was such a significant change to the rate of income tax was in April 2010 when the additional rate of income tax of 50% for higher earners was introduced. At the time, the announcement of the increase to the top rate of income tax led to HMRC having a bumper tax take in the month of March 2010, as bonuses were accelerated and share options were exercised before the increase took effect. We may see similar tax planning because of the abolition of the current additional rate of 45%, albeit in the other direction if bonuses and the exercise of options are deferred until after 6 April 2023. We will have to wait and see if any anti-forestalling provisions are included as part of the change.
The removal of the additional rate does not apply to non-savings, non-dividend income in Scotland, and the First Minister has suggested that she is in no hurry to follow suit. The Scottish government will set out its decisions on tax when it outlines its own budget plans later this year.
The government announced further changes to the National Insurance rates and the withdrawal of the Health and Social Care Levy as a separate tax:
– National Insurance Contribution (NIC) rates will be cut by 1.25% for employees, employers and the self-employed
– This will reverse the uplift introduced in April 2022, which was partially lifted from July 2022, eradicating it with effect from 6 November, through to the remainder of the tax year.
– This rate reversals will cover Class 1 (employee and employer), Class 1A, Class 1B and Class 4 (self-employed) NICs.
The early announcement by HMRC is aimed to provide employers with enough time to make the fundamental changes to payroll systems required for November payroll onwards.
The percentage rate at which Class 1A and Class 1B National Insurance contributions (NIC) are arrived at is aligned to the employers’ Class 1 NlC rate for the tax year in which the benefit is made available. For the tax year 2022/2023 statutory filings there is now a question around what rate to apply. Any employer looking to file early forms P11D/P11D(b) or PAYE Settlement Agreement Returns, may want to hold off on their cost analysis until the finer details are known.
The government has announced the repeal of the changes to off-payroll working brought in from April 2017 for the public sector and as extended to all medium and large organisations from April 2021. The repeal will take effect from 6 April 2023 with the status determination burden reverting back to the “IR35” entity, e.g. personal service company.
We await the further details and draft regulations for the repeal, and if any finer details are to emerge from HMRC. In the meantime, this appears to create a new level of uncertainty for businesses. After years of investment in changes, strategy, supply chains, policies and controls, what do engagers keep of their current onboarding processes and where can engagers start to safely relent? How will a business perform a status assessment on Monday, knowing its impact may only last until the end of the year? For those businesses that introduced a ban on the use of “IR35” contractors as the only workable solution for their organisation under the off-payroll changes, do they now contemplate a change back again?
It was clear the revised rules on IR35 were not meeting anyone’s needs, and the Public Accounts Committee emphasized this in their report, so we welcome change and simplification. We do all however need to understand where this places the real status risk, and on whom any repercussions of non-compliance will be directed if the rules are to be enforced at all.
The cap on bankers’ bonuses is to be scrapped. Ostensibly this is aimed at preventing the drain of talent to the continent but clearly, there will be some political backlash. The fact that the measure was leaked ahead of today’s announcement will perhaps lessen the sting.
With effect from April 2023, the longstanding company share option plan (CSOP) is being boosted in two
CSOP enables qualifying companies to grant market priced options to employees which are taxed as capital gains when the shares underlying the option are sold. Non-tax qualified options are taxed as employment income on exercise.
The changes to CSOP announced today are likely to be of most benefit to listed companies (the increased limit) and larger private owner managed businesses (OMBs). In the OMB space, tax qualified enterprise management incentive (EMI) options are hugely popular. However, only companies with less than £30m gross assets and fewer than 250 employees qualify. CSOP is not subject to such size tests. Historically, companies with more than one class of share capital have found it difficult to qualify for CSOP.
Although the details of exactly how this restriction will be “eased” are not yet clear, it is likely that there will be a number of companies that have outgrown EMI which will, from April 2023, be able to award tax qualified options under the amended CSOP rules.
From April 2023, the maximum amount of Seed Enterprise Investment Scheme (SEIS) investment that can be raised by a qualifying company will increase from £150,000 to £250,000. The qualification requirements have also been relaxed. The government has also hinted that the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCT) regimes are to be extended in the future.
Stamp duty is to be cut permanently for individuals purchasing residential property in England and Northern Ireland with effect from today. The threshold at which stamp duty will become payable is to be doubled to £250,000 and the threshold for first time buyers is to rise to £425,000. The maximum value for the first-time buyer’s relief will now be increased from £500,000 to £625,000.
The other measures which caught our eye were: