Sean Farnell, Partner at Burgis & Bullock, assesses the announcements made on Friday, September 23 in Chancellor Kwasi Kwarteng’s fiscal statement.
In his statement, Kwarteng outlined how the Government’s aim is to have the economy growing at 2.5 per cent in the medium-term. He said the country needs to ‘unleash the power of the private sector’… but what will be the immediate impact on businesses in the UK?
Ultimately, something had to be done to stimulate the UK economy and I don’t think you’ll find anyone to argue that the economy has under-performed in the last few years.
Kwarteng has announced the biggest tax cuts of any budget since 1972, according to the Institute of Fiscal Studies, and while this could be seen as gamble, the country simply couldn’t carry on doing what it was doing before.
It was an interesting and bold statement. The measures introduced, coupled with the announcement on energy price caps earlier in the same week, will undoubtedly be a boost to businesses… but the same question always remains, does it go far enough, and will it work?
The reversal of the 1.25% point increase in National Insurance rates is good and certainly a sensible course of action to take because of the squeezed incomes for individuals and margins for businesses.
It will make a big difference immediately to businesses, and the more staff you have, the higher the benefit. It was a double positive for businesses with confirmation of the cancellation of the Health and Social Care Levy, which would have consolidated the increased National Insurance liabilities
Another positive is the reduction of the basic rate of income tax to 19% in April 2023 – bringing forward the change by 12 months. Anything that puts more income in people’s pockets is good for households, the economy and business.
Changes aren’t necessarily the only thing that will benefit businesses and help them through these difficult times, keeping some taxes the same can be an equal boost for cash flow forecasting and other forward planning.
Therefore, abolishing the rise in corporation tax is absolutely the sensible thing to do. Businesses I speak to as clients and in networks on a day-to-day basis were very concerned about the proposed rise to 25% for corporation tax, so this was a very welcome announcement.
The changes in the stamp duty land tax came as a surprise, and fundamentally I’m not sure if that will really have a tangible impact in the long run, as SDLT savings generally lead to higher housing prices, as was seen in 2020 when the Covid relief was brought in.
The Annual Investment Allowance (AIA), or capital tax allowance as it is more commonly known, will be retained at £1 million from April 2023 rather than being cut as previously announced. This is great news and provides a great incentive to invest, which brings us nicely to the establishment of investment zones in England.
It is yet to be seen where these investment zones land, but they will see tax incentives, planning changes and other support for local economies in which they are based.
In principle, they are an excellent idea. They may be politically challenging, but they will encourage businesses to relocate and bring prosperity to an area. They are used widely around the world in some of the more dynamic economies to great effect.
It will be interesting to see where they end-up geographically, but wealth is only generated by business and it’s positive to see trust being put in the private sector to drive the growth of the economy.
Outside of Kwarteng’s main announcements, a scheme was announced to help firms facing soaring energy costs.
While this will come at a very high cost for the country, it will without a doubt help businesses to stay afloat – particularly in the hospitality industry (however, that sector will need more support and fast).
We have clients whose energy bills were set to go up ten-fold, in some cases even more, and these aren’t even businesses I would deem high energy users. The reassurance that some help is on the way is well overdue.
Despite this, we will still see a lot of businesses really struggling over the next few months and coming year. It will be interesting to see the attitude of main creditors and HMRC to businesses over the period, but I think an increase in insolvencies is inevitable.
There has already been an indication that further changes are being discussed for the New Year. This was a comprehensive ‘mini’ budget.
If Kwarteng’s first announcement was only a case of him tipping his toe in the water, who knows what it will look like when he goes all in for 2023.