The Latest Chancellor Boils Frogs to Balance the Books

Fiscal statements are like buses.

You wait months for an update from the Government and then two appear within weeks of each other.

In this case, the first bus was going to Neverland and the second bus looks like it’s taking us on a much bleaker journey to Destination Recession.

As expected, the latest Chancellor announced a complete turnaround in the Government’s approach to spending and taxation in his Autumn Statement.

In just a few weeks we’ve gone from the biggest tax cuts in decades to the largest fiscal tightening for years.

And while the markets might be reassured by the government’s plans to reduce the deficit, we’re not sure that many business leaders or working people will be, as they will have to bear the brunt of the Government’s indecision.

Corporation Tax up to 25% in April 2023

It had already been announced before the Chancellor’s statement that Corporation Tax would rise from 19% to 25% in April next year.

And thankfully, there weren’t any more major announcements that could significantly impact business profits and investment decisions.

Thresholds and Allowances Frozen

Among the main headlines, the Chancellor announced threshold freezes to income tax, NIC including employer NIC, and inheritance tax (IHT) for an additional two years, until April 2028. This includes the £5,000 employment allowance.

The capital gains tax (CGT) annual allowance will reduce from £12,300 to £6,000 in April 2023 and to £3,000 in April 2024.

The dividend allowance will be halved from £2,000 to £1,000 from 6^th April 2023 and again to £500 in April 2024.

Dividends received above this level will be subject to the higher dividend rates that were introduced from 6 April 2022 and continue to apply (8.75% for basic rate taxpayers, 33.75% for higher rate taxpayers and 39.35% for additional rate taxpayers).

The VAT registration threshold will also be maintained at £85,000 until 1 April 2026.

The Boiling Frogs Approach – Taxation by Stealth

It’s important to note here that while headline tax rates might not have risen, more people will be paying higher taxes after this Autumn Statement.

They just might not realise it.

When tax thresholds and allowances are frozen and don’t increase in line with average earnings or inflation, then more individuals, households, and businesses are dragged into higher tax brackets and pay more tax.

The technical name for this is ‘Fiscal Drag’. It’s actually taxation by stealth.

Or more to the point, it’s the “Boiling Frogs” approach to taxation.

If the government had announced big tax rises, we – the simple frogs! – would have noticed the hot water and jumped out of the pan.

Instead, the government is warming up the water slowly, freezing taxation thresholds and hoping that we won’t notice while we’re slowly doomed and dragged into higher tax brackets.

It’s estimated by the OBR that there will be 3.2 million new taxpayers and 2.6 million higher rate taxpayers created by the freezing of thresholds for 6 years.

The threshold for the 45p rate of income tax will also be reduced on 6^th April 2023, from £150,000 to £125,140, so roughly 250,000 people will enter the higher rate band of tax.

R&D Relief Reduced from April 2023

It’s also worth noting that from April 2023, R&D relief will be reduced for SMEs.

The deduction rate for qualifying R&D expenditure under the SME scheme will be cut from 130% to 85% and the cash repayment credit under the SME scheme will also be reduced from 14.5% to 10%.

At a time when the Government needs businesses to invest, innovate and grow the UK economy, increasing the tax burden and reducing R&D relief might be seen as an unwise choice to say the least!

However, in some relatively good news, the credit amount available under the large company R&D expenditure credit (RDEC) scheme will be increased from 13% to 20%.

What’s more, taxpayers – and their accountants! – who are accustomed to listening to HMRC’s hold music for long periods of time will not be happy with the idea of an increasingly complex tax system and the increased pressure this will put on HMRC’s already stretched resources.

The government might be taking the ‘boiling frogs’ approach to balance the books, but if it leads to reduced confidence and spending by businesses and households, then its policy of taxation by stealth might not have the desired effect.

Some Good News: Business Rates

When it comes to business rates, there was some good news. The government announced a support package of £13.6bn to reduce the impact of business rate increases on businesses in April 2023. Relief for retail, hospitality and leisure industries will also be increased from 50% to 75% (worth up to £110,000 per business) and extended to 2023-24.

Lack of Clarity on Energy and Fuel Costs

With regards to energy costs, the Chancellor committed to maintaining the Energy Price Guarantee, but on less generous terms. The £2,500 cap on typical energy bills will increase to £3,000 by April.

But business leaders who were hoping for more clarity on what will happen to the Energy Bill Relief Scheme (EBRS) after April 2023 will be concerned by the lack of detail.

Energy intensive sectors, particularly manufacturing, are crying out for certainty on this issue as they try to put together their forecasts and make investment decisions for the coming year.

Finally, the Chancellor strangely neglected to mention in his statement that, according to the OBR, it is likely that a 23% increase in fuel duty will be imposed from March next year.

It’s estimated that this will raise the price of petrol and diesel by around 12p a litre.

We’re not saying that Mr Hunt knew that this increased cost wouldn’t go down very well with individuals and businesses who are already dealing with spiralling fuel costs, but as Ronan Keating once sang, “You say it best, when you say nothing at all.”

Confidence, Clarity and Stability – Is it too much to ask?

UK businesses will have a critical role to play in growing the UK economy out of recession over the coming years.

For this to happen, business leaders need clarity, confidence, and stability in order to make sound strategic decisions, particularly around investment.

Unfortunately, rising inflation, energy bills uncertainty, high interest rates and increased taxes mean that confidence, clarity, and stability are in very short supply.

We just hope for our clients’ sake that the measures announced by Mr Hunt will last longer than a lettuce this time.

DISCLAIMER:

This material is published for information. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. No responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by The Uncommon Practice.