Tax rises and significant spending cuts are expected to be announced this Thursday 17th November.
The new Chancellor of the Exchequer Jeremy Hunt announced last month that the vast majority of tax cuts and reforms introduced by his predecessor Kwasi Kwarteng will be dismantled.
Naturally, these tax changes will significantly impact business owners. While we can’t fully predict what the Chancellor will say on Thursday, there have been indications from the government regarding what to expect.
Corporation Tax will rise to 25% from 1st April 2023. This was originally planned some time ago and reversed in Kwarteng’s Mini Budget. However, the government essentially ‘reversed the reversal’ and the increase will be going ahead as planned.
This rise coincides with the end of the extension of the super deduction on capital expenditure (the temporary enhanced first year capital allowances).
The new Chancellor has confirmed that the Annual Investment Limit, which was due to be reduced to £200,000 from April 2023, will remain at a permanent level of £1 million.
Hopefully, there will be further announcements which may improve expenditure on general plant and machinery, as well as other capital allowances.
Jeremy Hunt confirmed back in October that the previously announced reforms to the tax-advantaged Company Share Option Plan (CSOP) will go ahead.
This is welcome news for businesses, and we will have more details on these reforms following the announcement this week.
We have previously discussed EMI schemes and their benefits. We believe they are ideal for entrepreneurial SMEs that might not be able to match the salaries that other larger, more established firms can afford.
Global Minimum Tax
You might have heard of OECD Pillar 2 – this is a global minimum corporate tax rate of 15% for multinational enterprises that meet a €750m turnover threshold.
Some draft legislation was published in July 2022 and the changes are due to come into effect in the UK for accounting periods beginning on or after 31st December 2023.
However, there is still work to be done around specific areas where further international engagement is needed.
Energy Profits Levy
The Energy Profits Levy was first announced by Rishi Sunak during his stint as Chancellor and is a temporary windfall tax on oil and gas companies. It is designed to help fund government measures which should ease the impact of high energy bills on consumers.
The levy is currently an additional 25% tax on UK oil and gas profits, on top of the existing 40% headline rate of tax for those companies.
It is possible that the rate could be increased by the chancellor to 30% and/or the temporary timescale extended from December 2025 to 2028.
Furthermore, there are suggestions that the levy could be extended to electricity generators that produce power from renewable sources and nuclear. These currently benefit from contracts linked to gas prices.
The government has given some tax breaks for residential property, and there may be revisions to the stamp tax system in relation to commercial property and shares.
The establishment of ‘investment zones’ where tax benefits (such as capital allowances, stamp duty land tax, and business rates relief) will be available for ten years was first mooted in Kwarteng’s September statement.
There have been no timescales established yet, but apparently Hunt has confirmed a review is under way. Perhaps we will see more detail this week as to whether there is a scaling down of the project, for instance, a cap on the number of zones.
Jeremy Hunt is expected to announce the rate of the banking surcharge taking effect from 1st April 2023. This affects Banking companies including building societies (banks) within the charge to UK Corporation Tax (CT).
Currently, it will reduce to 3% (from 8%) from 1st April 2023 to coincide with the increase in the main corporation tax rate to 25%.
However, it has been suggested that this position may be reviewed due to the banks’ increased profits from rising interest rates.
What about personal tax?
Naturally, there are concerns regarding business tax, but personal tax issues are just as important to many, and there are changes expected to be announced regarding these matters in this week’s statement:
- Income tax – The chancellor plans to reverse the 1% reduction in the basic rate of income tax, and it now seems likely that the current basic rate of 20% will remain in place for the foreseeable future.
- National Insurance – The temporary 1.25% percentage point rise in National Insurance contributions has been reversed and rates have dropped back 2021-22 levels (broadly, 12% or 2% above the upper earnings limit for employees and 13.8% for employers). These levels will continue to apply from 6th April 2023. The Health & Social Care Levy was canceled and will not be introduced next year as planned.
Capital Gains Tax
CGT rates have remained the same since April 2017 and the Chancellor may decide to increase them.
The rates are currently 10% at the basic rate and 20% at higher and additional rates. These are 18% and 28% for disposals of residential property.
Hunt could implement the following changes in this week’s statement:
- Cut the annual exempt amount, which currently stands at £12,300.
- Increase the rates.
- Adjust reliefs such as Business Asset Disposal Relief (BADR), which used to be known as Entrepreneur’s Relief. The changes could involve increasing the rate above 10% or alternatively reducing the lifetime allowance of £1m.
It is unlikely that any changes would come into effect before 6th April 2023. However, it is not impossible. Thus, we have provided a reminder of the rules concerning when CGT is triggered.
CGT is triggered when a contract becomes unconditional.
In this case, the basic rule is that the time of disposal is the time the contract is made and not, if different, the time when the asset is conveyed or transferred (e.g., the date of completion).
However, if a contract is conditional, then the disposal will not be treated as taking place for CGT purposes until the relevant condition is fulfilled.
These differences are important to consider when trying to trigger the tax point of a transaction before an expected tax rise. This is because sellers will want to ensure that their contract is not conditional and so they can potentially secure lower tax rates.
Ultimately, if rates do increase, it would be prudent to confirm whether any ‘conditional contracts’ are actually conditional for tax purposes, or whether the only conditions are conditions subsequent, which do not make a contract conditional in terms of tax purposes.
This approach might lead to an earlier trigger point for the tax, but the actual tax payable would be lower.
We understand it is hard to keep up with the changes of this government and everybody is in a state of uncertainty at the moment.
However, we will update you following the Chancellor’s announcement on Thursday regarding the new plans that will be implemented, and how these could affect your tax planning.
Contact us today with any queries.