In a series of unfortunate events the UK economy and tax framework has been knocked backwards and forwards in the past few weeks. Peter Webb, our Head of Tax Advisory, reviews the turmoil.
On 23 September the UK Chancellor, Kwasi Kwarteng, delivered Liz Truss’s plan for the economy; a bold plan of tax cuts with the aim of stimulating “growth, growth, growth”. Yet his refusal to allow the Office for Budget Responsibility to assess the economic impact of the budget and provide a forecast resulted in financial turmoil, seeing the pound reaching its lowest ever value against the dollar and a rare censure for the UK government from the International Monetary Fund. The plan to scrap 45% Income Tax was reversed, although by then the damage had been done; the attempt to provide a significant tax break for the very wealthiest in society by reducing welfare benefits for the most vulnerable gave pause to even the most hard-line Tory MPs.
In another hugely embarrassing U-turn, Liz Truss then fired Kwasi Kwarteng after just 38 days in the job and announced that her plan to scrap the Corporation Tax rise was also being reversed.
Jeremy Hunt, a senior Conservative figure with a cabinet career stretching back to 2010, was appointed Chancellor on 14 October, and moved quickly, acknowledging that mistakes had been made and that it was vital to “show the world we have a plan that adds up financially”. In an emergency statement made in his first few days in office Mr Hunt announced the scrapping of almost all of the remaining tax cuts from the September mini-budget. The following tax cuts have now been reversed:
- Corporation Tax will now rise from 19% to 25% in April next year.
- The 45% top rate of Income Tax will stay in place.
- Cutting the basic rate of Income Tax by 1% will no longer happen.
- The freeze in the rates of alcohol duty will no longer take place.
- The plan to introduce VAT-free shopping for overseas visitors has been scrapped.
- The rules for off payroll working will stay in place and will not now be relaxed.
- The reduction in the tax rates on dividends has been reversed.
All that we have left of Liz Truss’s plans for “growth, growth, growth” are:
- The reversal of the 1.25% increase in National Insurance Contributions.
- The increased reliefs for Stamp Duty Land Tax with the Nil Rate Band extended to £250,000, increasing the level at which first-time buyers start paying SDLT from £300,000 to £425,000 and allowing first-time buyers to access this relief on property purchases up to £625,000.
As well as rolling back tax cuts, Jeremy Hunt has also limited the energy price cap which will no longer be in place for two years but will be reviewed in April. There are undoubtedly further spending cuts to come, and the Chancellor has not ruled out raising taxes. In his own words there are “…. decisions of eye-watering difficulty” needed to restore confidence in our national finances.
So what now?
Politically it’s going to be very difficult for Liz Truss; after all she campaigned as traditional Tory tax-cutter. Her future looks likely to depend on market reaction to Jeremy Hunt’s emergency statements and her own party’s reaction to this rejection of her campaign pledges. It’s clear she, and the UK economy, aren’t clear of the woods yet.
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