When Mr Sunak finished delivering his October 2021 Budget speech, a war in Europe would not have been in his thoughts as he considered the plans he had just set out for the post-pandemic economic recovery. Following the stern rebukes he received for the repeated ‘leaks’ prior to his last Budget, there were no major leaks this time, just vague references to his desire to help with the cost of living ‘crisis’ and increasing fuel costs.
The emphasis today was that the speech was not a Budget, but a ‘Spring Statement’.
Understandably the pre-statement news concentrated on far more important and troubling matters as the war in Ukraine shows no sign of ending any time soon.
As background to today’s announcements, in his contribution to the 2022 Mais lecture in February, Mr Sunak made the following points:
- He firmly believes in lower taxes in the UK;
- He wants to deliver a low tax economy in a responsible way;
- He accepts that it is hard to cut taxes when the demands on the state are growing;
- He will achieve his plans through capital, people and ideas;
- One aim is to cut taxes on business investment;
- Do current tax and financial incentives focus on the right kind of skills training; and
- R & D spending lags well behind the OECD average – what more can he do?
Against the current uncertainty, what tax changes has he made, or is planning for the coming years? The Election is not far away – 2 May 2024 to be precise! Have his plans been upset by the recent events in Ukraine, or has he been able to push on with some of his initiatives? I will let you be the judge of that.
Measures announced today
Fuel duty will be cut by 5 pence per litre with effect from 6 pm on 23 March. The first time there has been such a reduction in twenty years – but against an unprecedented backdrop.
The reduction will remain in place until March 2023.
VAT – energy saving expenditure
Up to now the rate of VAT on energy saving equipment, such as solar panels, heat pumps, wind, and water turbines, had been fixed at 5% as a result of EU rules.
The rate will be reduced to 0% in April 2022 and will remain at that rate for the next five years.
Cost of living support
The household support fund will be doubled from £500 million to £1 billion to help the most vulnerable families with increased living costs.
Mr Sunak announced the publication of his tax plan for the country. He wants to build a stronger economy by reducing taxes and reforming the way in which some tax rules operate. This could herald the arrival of some much-needed simplification, a theme I have pushed for many years now.
In essence the aim of the tax plan will be to:
- Assist families with the increasing costs of living;
- Promote growth of the economy; and
- Sharing more fairly the results of the growth.
Mr Sunak has three areas of focus for developing a stronger economy
- People – is the tax regime doing enough to incentivise employment;
- Ideas – the R & D regime has been singled out for attention. It needs to be more effective than it is at present, and it must deliver better value. There will be substantive announcements in the autumn Budget with draft legislation published in the summer; and
- Capital – the tax rules must encourage business investment in all its forms.
The employment allowance will be increased to £5,000 in April.
National insurance – alignment of thresholds
Until today there has been an anomaly in the tax system, the thresholds for national insurance and income tax have been different which has created uncertainty and confusion for many. Mr Sunak announced today that an immediate alignment, rather than a phased approach, will be made.
The primary threshold and lower profits threshold will each be increased to £12,570, the individual personal allowance for income tax, in July.
Mr Sunak was at pains to point out that the savings for workers as a result of this measure will more than offset the increase in NI as a result of the new levy coming in to force in April.
Business owners may need to revisit their profit extraction models to see what ‘tweaking’ may now be necessary in view of the reduced NI cost with salary.
Income tax rates
Mr Sunak’s final ‘bombshell’ was his announcement that he intends to reduce the basic rate of income tax to 19% before the end of this government’s current term. He claims that this is the first such reduction in 16 years.
He explained that the reduction is fully costed and paid for.
Personal taxation – what we know
There are to be no changes to the rates of income tax for the new tax year.
The personal allowance and higher rate thresholds are frozen until April 2026:
- The personal allowance is £12,570 from 6 April 2022; and
- The level at which the 40% rate of income tax will apply is £50,270.
These measures alone will generate considerable sums for the Treasury over the coming years.
Capital Gains Tax (‘CGT’)
The annual exemption remains at £12,300 until April 2026.
Mr Sunak made no mention of any potential changes to the CGT regime.
The nil-rate band remains at £325,000 until April 2026.
Business taxation – what we know
The future corporation tax increases are detailed below for reference.
The rate of corporation tax will increase from 19% to 25% with effect from 1 April 2023 for companies with taxable profits of more than £250,000. For small companies, with taxable profits below £50,000, the rate of corporation tax will remain at 19. The rates will taper for companies with taxable profits between £50,000 and £250,000. This will provide a gradual increase in the effective rate of corporation tax. The rate of corporation tax in the margin will be 26.5%.
The lower and upper limits will be proportionately reduced for short accounting periods and where there are associated companies. Group loss relief planning is likely to become important for many groups.
The ‘super deduction’ first-year capital allowance of 130% for main rate expenditure remains for expenditure incurred before 1 April 2022. The rules will need to be reviewed with care because of the pooling requirements and the issues which can arise with a sale of an asset in respect of which a super deduction has been claimed.
The Annual Investment Allowance of £1 million is available for expenditure incurred before 1 April 2023.
Loss-making companies can carry back trading losses of up to £2 million arising in each of the two financial years to 31 March 2022 for up to three years. Note that loss carry back claims can be made outside a corporation tax return where the loss in question is less than £200,000.
The above changes will mean that company tax planning may become more important for a lot of companies in coming years.
Creative tax reliefs
The reliefs available to those companies involved in the creative sectors (museums, art galleries, theatres, orchestras etc.) were doubled in the October 2021 Budget. The reliefs will return the pre-increase levels in 2024.
There will be a tapered reduction back to the pre-increase rates from 1 April 2023 to 1 April 2024.
The reliefs are shown in the following table:
|Theatre – non-touring/touring||20/25||45/50||30/35||20/25|
|Museums, galleries, exhibition
Indirect taxation and other measures – what we know
Value Added Tax
No other changes to VAT were announced.
The VAT registration threshold is fixed at £85,000 until 31 March 2024.
Stamp Duty Land Tax
No changes or further reliefs were announced.
No changes were announced.
The pension lifetime allowance will remain at £1,073,100 until 2026.
Tax reminders for measures already in place
There are certain tax changes which have already been announced, or which are already in place, which are detailed below.
National insurance contributions and dividend tax increases from April 2022
National insurance contributions (‘NIC’)
From 1 April 2022, there will be a temporary 1.25% increase in Class 1 (employee and employers) and Class 4 (self-employed) NIC.
As from April 2023 the increase will enacted as a separate tax – a ‘health and social care’ (‘H & SC’) levy. The NIC rates will then return to 2021/22 levels.
The H & SC levy will extend to individuals working above state pension age, who are currently exempt from paying NIC.
Dividend tax rates
The following rates will apply from 6 April 2022:
- 8.75% for dividends in the basic rate band;
- 33.75% for dividends in the higher rate band; and
- 39.35% for dividends in the additional rate band.
The dividend allowance of £2,000 will remain.
Remember that the rate of tax payable by companies on any overdrawn director’s loan account (‘DLA’) will also increase to 33.75% as this rate is linked to the rate of tax payable on dividends. Thus, DLA planning may become a little more important for some owner managed businesses.
Owner managers may want to review their profit extraction strategies on the back of the above and potentially bring forward dividend payments. Any dividend advancement would have to be weighed up against the commercial and practical factors.
Residential property sales
The reporting and payment requirements for CGT in connection with residential property sales are still causing problems for taxpayers with investment property and/or second homes. The sale of a main residence does not normally need to be reported in this way.
It is clearly helpful that the reporting deadline has been extended to 60 days from 30 days but nevertheless a lot of taxpayers are still unaware of the new rules.
With suitable planning, the calculations should be straightforward to complete, perhaps with a little help from their accountant!
Once the taxpayer has set up their CGT account with HMRC it is then easy enough for them to appoint an agent to make the necessary return on their behalf. Once that is done the payment process is routine.
Making tax Digital (‘MTD’)
MTD for VAT will apply to all VAT registered businesses from 1 April 2022.
As we know, following the announcements in September, MTD for income tax will now be mandatory from April 2024.
The ‘rationalisation’ of tax basis periods for sole traders and partnerships is now set to coincide with MTD for income tax – i.e. the tax year 2024/25. There will be a transitional year 2023/24.
MTD for corporation tax will be the last of the MTD initiatives and will not be in place for some years yet.
Taxpayers will need to pay attention to these developments so that they engage with their advisers, and HMRC, in time to ensure that they can comply with the new rules.
With the progression of the MTD initiatives there is to be a new points-based penalty regime for filing failures. The implementation date has been delayed another year.
The new regime will be effective as follows:
- For VAT from 1 April 2023;
- For businesses, and landlords with income over £10,000 from 6 April 2024; and
- For other personal taxpayers from 6 April 2025.
The new regime is intended to ‘punish’ more harshly those who miss deadlines regularly, rather than those who occasionally default due to a simple oversight. The penalties are clear because they are fixed.
With the delay to the introduction of MTD for income tax, no ‘soft landing’ is expected with the new penalty rules, so all taxpayers will need to be aware of them in time to avoid unexpected fines.
Basis period reform – sole traders and partnerships
The reform will involve businesses moving from the ‘current year’ basis to a ‘tax year’ basis. This will mean that business profits will be calculated for the tax year rather than for the accounting year ending in the tax year. This will align the treatment of trading income with non-trading income.
There will be a transitional year for sole traders and partnerships that do not use 5 April or 31 March as their accounting date. This will advance tax liabilities for many businesses.
The change will be effective for the tax year starting 5 April 2024. The tax year starting 5 April 2023 will be a transitional year.
The proposals were detailed in draft legislation in the Finance Bill 2022. It is hoped that there may be further tweaks to the rules before the changes come into effect. The proposals fit in with the arrival of MTD for income tax in 2024 and gives another indication that the acceleration of self-assessment payments may be coming soon.
Zero emissions vehicles
100% first year allowances for business expenditure on business cars, and zero emissions goods vehicles are in place for all expenditure incurred prior to 1 April 2025.
With the company car benefit in kind percentage at 2% for 2022-23, 2023-24 and 2024-25, now could be a good time to be considering switching to an electric company car.
HMRC Trust Registration Service (‘TRS’)
As mentioned in the October 2021 Budget summary, the TRS has been operational since June 2017. Up to now it has only been necessary for trustees of trusts paying Income Tax and/or CGT to register their trust using the TRS. The position has now changed, all trusts, subject to certain limited exceptions, now need to register.
The non-taxable trusts are called ‘express trusts’ for these purposes. As an example, trusts which are used for IHT planning, such as loan trusts and discounted gift trusts, must be registered.
The deadline for compliance is 1 September 2022.
Part of the process is what HMRC calls the ‘digital handshake’. One ‘issue’, which we have raised with HMRC, is the position of digitally excluded trustees. HMRC has, unhelpfully, told us that the only way around this is for the trust to appoint a trustee who is digitally capable.
The following links may be helpful for trustees who are approaching this issue for the first time.
The war in Ukraine understandably took up the first few minutes of Mr Sunak’s speech with him detailing the measures which have been taken by the UK to support Ukraine. He also indicated that the support is only possible because we have a strong UK economy which he wants to make stronger in a responsible and sustainable way.
Even though the speech was badged as a ‘Spring Statement’, there were several tax announcements which grabbed the attention and indicated that the Chancellor has been paying attention to some of the representations made to him.
The support measures for those most exposed to the cost-of-living increases are to be welcomed.
The alignment of the NI and income tax thresholds in July is welcome, it will remove complications and uncertainty for many. It will also give NI savings to counter the NI increases from April.
The promised reduction in the basic rate of income tax will focus the mind, with many no doubt hoping for further tax reductions before the 2024 Election.
The Budget in the autumn will contain more detailed measures which will be of interest to businesses with the reform of the R & D rules and investment incentives expected.
No immediate actions are necessary for anyone on the back of what was announced today.
Roll on the Autumn Budget!!
If you have any questions, or other points, in connection with the contents of this summary of the 2022 Spring Statement, please do not hesitate to get in touch through the normal channels.
Please bear in mind that this is a general overview of the 2022 Spring Statement announcements. Please take appropriate detailed professional advice before acting on any of the points made in this overview.