Chancellor of the Exchequer Rishi Sunak sought to address the cost of living crisis by increasing the National Insurance Contributions (NIC) threshold to £12,570, bringing it further in line with Income Tax.
With inflation set to reach 8.7% by the end of the year according to OBR forecasts and real GDP revised down to 3.8%, the impacts of the war in Ukraine are set to prolong the brewing cost of living crisis, with energy prices set to soar in April.
In response, the Chancellor reduced Fuel Duty by 5p per litre for a year starting from 6pm on 23 March until March 2023 and extended VAT relief for the installation of energy saving materials such as solar panels, heat pumps, insulation and wind turbines. A time-limited zero rate of VAT was also introduced for the installation of those materials from April 2022. The Northern Ireland Executive will receive a Barnett share of the value of this relief until it can be introduced UK-wide.
“Despite its impact on the government’s interest bill, there is a major benefit to inflation in that it helps bring down the debt-to-GDP ratio more quickly, providing the Chancellor more space to intervene to help with the cost of living,” Martin Wheatcroft, public finance adviser to ICAEW, explains.
According to the OBR, the new measures announced in the Spring Statement, along with the existing package announced previously, should offset around a third of the increase in costs that households are facing, leaving them with the burden of the other two-thirds, Wheatcroft says. “I think we should expect further measures from the Chancellor in the summer or autumn as the impacts on households become more apparent.”
Small beer for businesses
From a business perspective, the Chancellor increased Employment allowance to £5,000, cutting £1,000 of tax per employer. As a result, businesses will be able to employ four full-time employees on the National Living Wage without paying employer NICs. However, the Health and Social Care Levy will be introduced as planned.
Retail and hospitality businesses struggling with cost increases haven’t benefited from any further measures on business rates over and above the one-off 50% discount announced last year and the multiplier freeze.
However, with energy cost increases putting pressure on budgets for many businesses, the government has recognised the disincentives the business rates system has provided for those businesses wishing to generate their own electricity. Qualifying energy efficiency measures will be business rates-exempt a year earlier, from April 2022.
Companies House reform was conspicuous by its absence within the Spring Statement. ICAEW had expected to see accelerated investment in this area, says ICAEW’s Policy Director, John Boulton. “Although funding for this initiative was announced in the Budget, it fell short of the £100m cost estimate in the government’s impact assessment for the period to 2025.”
Tax reforms on the way
The Spring Statement also included the unveiling of the Chancellor’s tax plan. This set out a number of proposed reforms and tax reductions, the most headline-grabbing being a cut in the basic rate of Income Tax from 20% to 19% in 2024.
Elsewhere, it sets out the government’s plans for capital investment, skills and innovation. In 2019, business investment accounted for 10% of GDP in the UK, compared with 14% on average across the OECD. Lower investment has been a key driver of the UK’s lower productivity compared to Germany and France.
Business investment is now recovering post-pandemic, growing by 0.9% in Q4 last year. However, it remains at 10.6% below the pre-pandemic level. The super deduction in capital allowances ends in April 2023. The government is now considering reforms to support business investment beyond this date, and the Chancellor announced the intention to consult with businesses and professional bodies on what this would look like.
“It is good to see the government commit to hearing from business on measures to reform taxes on business investment – we look forward to contributing to this review,” says Boulton.
The Chancellor also announced plans to improve the Apprenticeship Levy to allow more flexibility in how it is applied, to encourage more vocational training and qualifications. This announcement was welcomed by ICAEW.
Addressing the innovation gap
The tax plan also outlines the measures to reform the R&D tax system, including allowing R&D reliefs for R&D activities undertaken outside the UK, the inclusion of cloud costs within the scope of reliefs, and an expansion of all qualifying expenditure to include all mathematics.
“In his speech, the Chancellor admitted that the UK’s business R&D investment is still less than half of the OECD’s average as a percentage of GDP, which was quite an admission after 12 years of Conservative government,” says Shaun Beaney, ICAEW’s Corporate Finance Faculty Manager.
R&D tax credits have been a central incentive for innovation investment since 2000. They’re worth well over £7bn per annum, supporting 60,000 companies. But a report last year by David Connell of Cambridge Judge Business School questioned the effectiveness of such tax breaks in the specific venture capital and M&A context of the UK. “We’ll wait to see if Rishi Sunak is proposing to withdraw reliefs from some activities, having committed to expanding them in others,” says Beaney.
More change on the horizon
Frank Haskew, ICAEW’s Head of Taxation Strategy, says this is the start of another round of tax changes that we’re going to see over the coming months. “With his new tax plan, including the rise in the NIC threshold and the 1% reduction in the income tax rate from April 2024, the Chancellor appears to be effectively undoing some of the changes he introduced with the Health and Social Care Levy. The government will be giving away a significant proportion of the Levy it will be raising, a somewhat puzzling approach to tax policy, which calls into question why the Levy was introduced in such a hurry in September 2021.”
Wheatcroft adds that it is likely that some of the announcements included in the Spring Statement were brought forward to ease tensions with backbenchers. “With members of his own party pressing for a delay in the NIC increase, I suspect the Chancellor felt pressure to bring forward measures that he may have been saving for later in the year, in particular his planned cut to income tax in 2024 and a tax plan that was likely set for a summer release ahead of the Autumn Budget.”