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New UK Chancellor Gambled on Growth in Mini-Budget

Sept. 30, 2022, 7:00 AM

The UK’s new prime minister, Liz Truss, made tax cuts the core part of her Conservative leadership election campaign, and her new chancellor, Kwasi Kwarteng, duly delivered a surprising number of them on Sept. 23 as part of his “growth plan.”

The Measures

The new government’s intention not to go ahead with an increase in corporation tax from April 2023, even though it is already on the statute book, was duly confirmed. While this will cause company accountants some annoyance over changing their deferred tax calculations (and reductions in the value of deferred tax assets), most companies will be happy that the main rate of corporation tax will stay at 19% next year.

Another much trailed measure was the reversal of the 1.25% National Insurance contributions increase, only introduced back in April this year. While UK social security costs are not the highest in international terms, cutting back those costs for both employers and employees (taking some pressure off wage claims) will be much appreciated.

Perhaps more relevant is the proposal to create dozens of new “investment zones” across the UK in which investing businesses will have a 10-year tax honeymoon period. This will give them access to 100% stamp duty relief on buying land, 20% capital allowances on new buildings, 100% business rates relief, 100% allowances on plant and machinery, as well as payroll tax savings. It seems most of these will be in areas where “leveling up” is needed to improve the local economy.

Businesses hoping for more substantive improvements in investment allowances were disappointed though: the widely praised capital allowances super deduction will still end on March 31, 2023, although the annual investment allowance will stay at £1 million ($1 million) annually in the future as most had expected. Neither was there any further announcement on the ongoing research and development relief reforms due to take effect from April 2023.

More telling about this government’s approach to growth is perhaps the fact that it is cutting the top rate of income tax, from 45% to 40%. It is also removing the cap on bonuses for banking staff (currently limited to 100% of salary), and tweaked some other enterprise incentives to make them more attractive for companies and entrepreneurs. And there were also immediate cuts to stamp duty land tax aimed at getting the UK property market moving again—based on the old principle that a busy domestic property market helps to drive spending in the wider economy.

The chancellor also trailed a number of area where supply-side reforms are planned in the coming months and years. Predictably this referenced abolishing EU-based regulations by the end of 2023—particularly those affecting financial services businesses. While cutting red tape and regulations for businesses is easy to promise, for recent governments at least, it has been much harder to deliver. How many previous ministers have promised to modernize the UK’s building planning system only for reforms to get mired in controversy and be delayed or abandoned?

One deregulatory move that the government will be able to deliver on is the removal of the current rules for businesses (and all organizations) engaging “off-payroll workers” through their own personal service companies (PSCs). These rules were specifically introduced in 2017 for the public sector, and in 2019 for private sector businesses, to ensure the right amounts of payroll taxes are paid on engagement of contractors; previously, HM Revenue & Customs believed that most PSCs “bent the rules” to save tax. Putting the responsibility to assess, calculate, and deduct the right amount of payroll taxes on the engaging organizations did increase the tax take, but also put many under significant administrative strain—with stories of even government departments significantly underpaying.

Putting all the burden of these rules back onto the PSC from April 2023 will be a relief to many businesses’ HR departments but, if the clock is turned back, will we simply have a return to non-compliance by PCSs?

The Gamble

While this may not be a full return to the 1980s style of capitalism in the UK, it is certainly a change of tack back to traditional Conservative party values: the chancellor’s speech even included some moves to limit strike action by unions.

If such tax policies worked to generate growth before, where is the gamble?

The key issue is that alongside cutting taxes, the government is set to spend over £100 billion on its energy support guarantees to households and businesses. As with the government support invested to keep the UK economy going during the Covid-19 pandemic, few would argue against using energy subsidies to help businesses stay open and consumers keep their heating on isn’t money well spent. It’s just that it is a lot of money, and handing it out while also voluntarily cutting tax revenues looks bold to say the least, and may call the government’s fiscal stability into question if inflation cannot be brought under control.

The second major concern is that while you may be able to make the UK look more attractive to international investors, if the world economy is floundering, will they be able or willing to invest in the UK? And if they do build shiny new factories in one of the new investment zones, will there be export markets strong enough to buy the goods produced?

The biggest disincentives to business investment are not tax-dependent—they are created by uncertainty and risk. The markets have certainly had their say over the last few days with sterling falling against the US dollar and the euro and the price of gilts rocketing up, signaling their worries over unfunded tax cuts. The Treasury and Bank of England tried to reassure markets with statements on Monday, and we will see if this manages to calm market sentiment over the next few days.

Businesses are crying out for stability and predictability. In a poll carried out by BDO before the mini-budget, we asked, “Which single tax change would help British businesses plan and invest for the future?” 39% of respondents said that a five-year plan for business taxes would be most helpful, whereas only 22% opted for a low rate of corporation tax.

Stability in the tax system, as well as the economy as a whole, is important to give businesses the confidence to invest. I realize you can’t have stability when you have such a major change of tack in tax policy, nevertheless, from the outside, UK tax policy for businesses currently looks to be in flux at best.

Unless current political and economic challenges settle down relatively quickly, and the new chancellor sets out some long-term plans that businesses can rely on, implementing his growth plan in the next few years looks to have a very uncertain outcome—rather a gamble.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Paul Falvey is a Tax Partner at BDO LLP.

The author may be contacted at