After six of the most tumultuous weeks in government, things changed for the mini-budget announced by Kwasi Kwarteng on 23 September. We originally published an article on 30 September 2022 discussing the impact of the then Chancellor’s proposals. Soon after doing so, when almost all of the tax changes introduced as part of Prime Minister Liz Truss’s growth plan were unceremoniously scrapped by the new chancellor, Jeremy Hunt.
Now we discuss where we are in relation to all these changes.
As soon as the small budget was announced, UK markets reacted with volatility the likes of which we rarely see. The pound fell to an all-time low and the British economy plunged into chaos. Therefore, it was expected that the government would make changes. How far they will go has surprised many.
On 17 October 2022, Jeremy Hunt issued his emergency statement. He declared that “the main responsibility of every government is to do what is necessary for economic stability”. He went on to do a complete U-turn for the government, canceling many of the tax reforms announced by his predecessor just days before.
Chancellor Hunt’s announcement was meant to restore confidence in UK markets. To some extent it appears to have done so so far, although no doubt much damage has already been done and it will take some time to repair. Time will tell if the markets have calmed down on a medium or long-term basis, rather than simply as an immediate reaction to the apparent reversal we’ve seen.
So which of the tax reforms remain in the growth plan and which have been canceled?
The remaining amendments
1. National Insurance – From 6 November 2022 the National Insurance increase of 1.25% (on income) will be reversed.
2. Annual Investment Allowance – From April 2023 the £1m AIA level will become permanent. Businesses can therefore deduct 100% of eligible plant and machinery costs up to £1 million in the first year.
3. Investment Zones – These zones have not been explicitly addressed so far, so there is uncertainty as to whether they will actually be created, reduced, or eliminated altogether. They are designed to create areas that benefit from tax incentives and planning liberalization. Jeremy Hunt was challenged in questions after his statement on whether the zones would work, saying they would remain, although (a few days later) Michael Gove has now indicated he is considering them.
4. Early Enterprise Investment Schemes (SEIS) – As with investment zones, the government has been concerned about what will happen to these zones. SEIS (and enterprise investment schemes or EIS schemes) were not mentioned in the recent notice. However, at the time of writing it is understood that these will remain in effect. SEIS reforms announced in the Small Budget mean that from April 2023 companies can raise up to £250,000 under the scheme. The gross assets cap will rise to £350,000, the age limit for qualifying companies will double from 2 to 3 years and the investor cap will double to £200,000.
Amendments that were canceled
1. Income Tax – The basic rate of income tax will not be reduced now. The base rate of 20 percent and the top rate of 40 percent will remain “indefinitely”. The “surplus” rate of 45% income tax will remain.
2. Dividend Tax – The 1.25% increase that took effect in April 2022 was to be scrapped. Therefore, the dividend rate for basic rate, higher rate and additional rate taxpayers will remain 8.75%, 33.75% and 39.35% respectively.
3. Corporation Tax – The proposed increase to 25% will now continue, as previously planned, from April 2023. This will be for businesses with profits over £250,000. Businesses (other than investment companies, although for companies investing in real estate) with profits below £50,000 will now see no change. They will continue to pay 19% corporate tax. Those with profits between £50,000 and £250,000 will pay the marginal rate of tax.
4. IR35 Amendments – These amendments will not be repealed now. The responsibility for assessing IR35 status will remain with the company involved (if large enough) rather than the worker’s personal services company.
Many entrepreneurs will be happy to see that at least some of the tax reform, SEIS and proposed investment zones remain among them, even if the majority of them are gone.
As discussed in our previous blog, SEIS promotes investment in startups and early-stage companies by providing tax breaks to the investors who support them. SEIS is primarily used to invest in startups that are early stage and therefore seen as riskier investments, while EIS is used to invest in slightly larger and more mature companies. To reflect the risk, SEIS offers more tax relief to investors compared to EIS (50% versus 30% income tax relief), although the amount invested by investors under SEIS is lower. As discussed above, the SEIS reforms have increased the amount that companies can raise to £250,000, increased the age limit for eligible companies to three years, and raised the amount of investors to £200,000. has increased By comparison, companies can raise up to £5m per tax year using the EIS (ignoring ‘knowledge-based companies’) (and no more than £12m of EIS funding in total), individuals can 1 Millions of pounds to invest each tax year. Age limit for eligible companies is 7 years. Investing in a start-up company is considered risky by many, but these tax incentive schemes seem to reduce investment for the individual investor, thereby making investment more attractive, and without such schemes, start-ups and early-stage companies would find it very difficult. they do. More difficult to raise money The SEIS reforms will encourage more investment in companies, particularly at early stages, and the extra year will allow new companies to present a slightly more stable (and attractive) investment proposition to potential investors.
The Proposed Investment Zones are designed to create areas that benefit from tax incentives which may include business rate discounts, increased capital allowances for a period of time, discounts on employer national insurance contributions and planning liberalisation. The purpose of these zones is to provide extensive support to the local economy, so from the point of view of entrepreneurs, these new zones may be attractive if they are thinking of starting a company because they benefit from tax incentives and help to reduce costs as much as possible. they do. . However, details about what is planned for these areas have yet to be explained, and there are concerns about how much these areas could cost the coffers in lost taxes. An early estimate apparently put the figure at £12 billion. So time will tell if the government fulfills its previous promises to create these areas or somehow reduce the tax incentives. They may even decide to eliminate them altogether.
Although some of the remaining tax reforms may benefit entrepreneurs, they are still likely to be affected by the reforms that have now been repealed. Rising income tax rates in particular may be an issue. Small business owners can no longer benefit from lower interest tax rates as the 1.25% increase remains.
The increase in corporate taxes primarily affects businesses (other than investment businesses) that earn significant profits. Those businesses with profits of less than £50,000 will continue to pay tax at a rate of 19%. Therefore, an increase in corporate tax may not affect start-ups as much.
Since the tax returns promised to entrepreneurs are not quite as innovative as they may have been thought, it is important for start-ups to consider any aid, funding and incentive arrangements available to them.
Chancellor Hunt’s announcement is estimated to raise an extra £32 billion in tax revenue. Whether this will be enough to calm criticism of the government and restore confidence in UK markets remains to be seen. The medium-term financial plan will be included in an autumn statement to be presented on November 17. Rishi Sunak has now won the Prime Ministerial race (at the second time of asking). It remains to be seen how he and his newly appointed chancellor Jeremy Hunt will shape their future budget announcements and whether we will see a return to the government’s previous economic policy. But whatever the future course of events in this field, the fact remains that there are significant opportunities for entrepreneurs and the government does not want to stifle their efforts for long.