Steph Hurst is Tax Director for Corporate Tax Consultancy and Personal Tax Compliance at Monahans, the largest independent firm of chartered accountants and business advisers in the South West.
In a bid to combat a looming recession, the Government today announced a raft of changes to monetary policies in what was labelled a ‘mini-Budget’. Although it was far from ‘mini’; the announcements by Chancellor Kwasi Kwarteng saw the biggest tax cuts for half a century, amounting to about £45 billion.
In the recent Conservative leadership context, Liz Truss promised a ‘bold plan’ to cut taxes and boost the economy, whilst supporting businesses and individuals with soaring energy bills. She has seemingly delivered on this promise within just weeks of her appointment as Prime Minister, to the extent that the initiatives announced today go far beyond what was intimated in her campaign. [Indeed, she’s gone from ‘bold’ to ‘ballsy’.]
The Government’s intended support over the coming months is going to help a lot of people and businesses. But with the cost to the Treasury of capping energy bills amounting to a suspected £60 billion just over the next six months, plus the additional changes to National Insurance, Income Tax, Stamp Duty and Corporation Tax, the question remains how we will pay for this in the future. Some investors are betting that interest rates will rise to 3.75% by the end of the year to compensate. That’s untenable for those, for example, on variable mortgage rates. And the Government will need a viable exit strategy if energy prices do not fall in due course.
Unfortunately, uncertainty remains. The cancellation of an increase in corporation tax from 19% to 25% from April 2023 is a prime example. On the face of it this is a welcome move, particularly for small businesses with profits up to £250,000. But it doesn’t shed a light on what the future holds, making it difficult for businesses to make any long term investment decisions.
Various surprises in the Chancellor’s ‘mini-Budget’ go some way to encouraging investment in the economy, such as a rise in the Seed Enterprise Investment Scheme from £150,000 to £250,000. Start-ups will be the main beneficiaries of this and, with a tendency towards tech-based businesses, there’s scope for a great deal of growth in this area. The permanent scrapping of the Annual Investment Allowance reduction from £1,000,000 to £200,000 is also a big positive for businesses.
Where the Government could have made a real impact is by offering businesses greater incentives for research and development (R&D) projects that focus on reducing our reliance on fossil fuels and tax breaks for investing in energy efficient machinery – it would progress the UK’s aims to improve its home-grown energy supply and reduce the need for domestic fracking. Conversely, the Government’s move to lift a ban on fracking in England will arguably help boost the country’s energy security amid Russia’s ongoing war in Ukraine, but what will it do to the environment?
The ‘new’ Government is in between a rock and a hard place, needing to help people and businesses through turbulent times, whilst also ensuring prices don’t continue to rise at an unsustainable rate. It also faces the challenge of getting growth back to a target of 2.5%.
With one foot already in a recession, further tax cuts should ease the tightening of the purse strings that many feared over the winter, notably the capping of energy bills. The cancellation of the plan to increase National Insurance contributions, cutting the basic rate of income tax, scrapping the 45% rate of tax for high-earners [although this change has subsequently been reversed], and bringing down the highest rate of dividend tax to 32.5% will go a long way to helping. Radical changes to Stamp Duty Land Tax (SDLT) will also give buyers greater scope to get on the property market, particularly first-time buyers.
But, and it’s a big but, the amount of borrowing required to finance these moves is upwards of £100 billion. It remains to be seen how the Government will afford these cuts.
What’s more, the rise in interest rates of 0.5% to 2.25% (announced earlier this week) is aimed at encouraging people to save more and spend less – to stave off further rises in inflation. But the tax cuts announced will serve to giving people more expendable income. In the case of SDLT, this additional capital could prompt people to put their houses on the market and cause more investment in the already saturated housing market.
Whatever the outcome in the long term, businesses now have the opportunity to take stock, safe in the knowledge that the next six months will be more navigable than perhaps feared. It might be that today’s announcements have stuck a plaster over the problem but, by looking back at business plans – even making hay while the sun still shines – organisations have the opportunity to strengthen their positions and be prepared for the plaster being ripped off in the future.
About Monahans
Monahans is a leading independent firm of chartered accountants and business advisers with eight office locations across the South West, including Swindon, Bath, Trowbridge, and Taunton. From its foundations in the 1890s, its history of serving local business communities has grown to national and international expertise.
Offering a range of specialised services that include Corporate Finance, Audit, Tax Consultancy, Business Recovery and Insolvency, Digital Cloud Accounting, Elite Payroll, HR Services and Probate, the firm acts as a trusted partner to its clients, understanding their needs, providing insights, and supporting them with reassuring professional expertise.
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