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Tax cuts pile pressure on Holyrood ministers

Kwasi Kwarteng delivering statement

Chancellor Kwasi Kwarteng posed serious questions for the Scottish Government after announcing a cut in income tax and the cost of buying a home in England and cancelled next year’s planned rise in corporation tax.

The 1p cut in the basic rate of income tax in England will be brought forward by a year to next April, a tax cut for over 31m people who will benefit on average by £170 more per year. Basic rate taxpayers will be £130 better off, and higher rate taxpayers will be £360 better off.

He also abolished the additional rate of 45% on earnings above £150,000. In its place will be a single higher rate of income tax of 40%.

The policy removes the previous top rate tax, which was higher than countries such as Norway, US and Italy.

The tax system will be reviewed to make it “more dynamic” and encourage investment. Moving to three rates (0%, 20% and 40%) will result in one of the simpler rate structures in the OECD. The controversial off-payroll IR35 rules for contractors will be repealed.

Income tax and property tax divergence widens

The income tax cuts and changes to stamp duty do not apply in Scotland which has different thresholds. This will put pressure on the Scottish Government to follow suit, or have a higher tax regime than the rest of the UK.

In the case of income tax, workers already pay more than those in the rest of the UK. New analysis here shows Mr Kwarteng’s changes will mean no Scots will pay less tax than anyone in the UK and some will pay considerably more.

Ahead of any changes in Scotland, the 19% income tax rate will only apply to salaries between £12,571 and £14,732, increasing to 20% for those earning £14,733 to £25,688 and then 21% to £43,662. 

Susie Walker, head of tax at Johnston Carmichael, said: “It will be interesting to see how Holyrood reacts. Will there be further divergence between North and South of the Border? And if there is, what will the impact be on our talent pipeline? Key sectors including tech are already struggling to recruit.”

The chancellor announced a cut to the stamp duty tax paid on buying a home in England and Northern Ireland. This raises the threshold of how much a property has to cost before the duty is paid to £250,000 and for first time buyers it rises from £300,000 to £425,000.

About 200,000 more people will be taken out of paying stamp duty altogether.

Through Scotland’s land and buildings transaction tax a 2% charge is in place for homes priced between £145,000 and £250,000, rising to 5% between £250,001 and £325,000. A 10% rate is due for purchases between £325,001 and £750,000 while anything from £750,001 attracts a 12% charge.

Under the agreed Fiscal Framework, the Scottish Government is expected to have more than £460 million of additional funding across the Spending Review 2021 period as a result of these rate cuts to allocate as it sees fit.

Alasdair Humphery, head of Scotland at property agent JLL said:  “Plans to help both households and businesses alike with their bills will be welcomed across the UK but we can’t afford to lose sight of the need to address inequalities here in Scotland.  

“Changes to income tax rates or property tax south of the border will likely grab headlines, but what’s needed is a concerted effort to drive long-term investment and regeneration across Scottish towns and cities.”

David Alexander of estate agent DJ Alexander said: “I would hope that the forthcoming Scottish budget will match the raised threshold before property tax is levied and decrease the percentage of tax charged to ensure that Scottish and English homebuyers are operating on a level playing field.”

Jane Wood, the chief executive of the industry body Homes for Scotland, said: “At a time when Scotland has an undersupply of housing approaching 100,000 homes, this is highly concerning in the context of attracting investment and ensuring that those delivering the homes that our country desperately needs are on a level playing field with their counterparts south of the border.”

Business and consumer tax cuts

Under the previous UK government’s plans, the rate of corporation tax was to increase from 19% to 25% from April 2023 for firms making more than £250,000 profit, around 10% of actively trading companies.

Companies making between £50,000 and £250,000 were also due to face a rise, incrementally from 19% to 25% depending on how much profit a firm was making. 

The government has now cancelled this planned increase. Rather than rising to 25% from April 2023, the rate will remain at 19% for all firms, regardless of the amount of profit made.

Mr Kwarteng also scrapped the bankers’ bonus cap, arguing that it merely pushed up basic salaries and said he wanted to encourage top executives to locate in the UK.

Planned increases in duty rates for beer, cider and wine are also cancelled. Reforms to modernise alcohol duties will be taken forward to consultation.

There was some disappointment that he did not mention business rates or VAT which were seen as tools to achieve a quick solution to cutting business costs.

The 2017 and 2021 reforms to the controversial off-payroll working rules known as IR35 will be repealed, bringing some relief to contractors and employers.

However, Penny Simmons, legal director at Pinsent Masons, said the rules will still exist, only that contractors will once again be responsible for compliance and payment of tax.

“Businesses will remain exposed to tax risks by virtue of other tax rules and the corporate criminal tax offences – if they pay contractors off-payroll when they know that the contractors should be taxed as employees,” she said.

“The Chancellor has also said that they will keep compliance under review – the rules were changed because HMRC thought 90% of contractors weren’t applying the rules correctly – so if HMRC thinks this is still the case, we may well see further changes, albeit in a different form.

“Ultimately, although the initial reaction may be positive, there will likely be frustration amongst business regarding the significant amount of time and money that has been spent on compliance with the rules and there remains uncertainty regarding what might come next. It is also unclear what position HMRC will take when dealing with businesses who have inadvertently fallen foul of the rules in this interim period.”

Mr Kwarteng announced the re-introduction of VAT-free shopping for overseas visitors. Joss Croft, CEO at UKinbound, said “We are incredibly pleased that Government has listened to the tourism and retail industries and will be introducing a modern, digital VAT-free shopping scheme.”

The Annual Investment Allowance threshold has been permanently set at £1 million, rather than reverting to £200,000. This is a 100% capital allowance for qualifying expenditure on plant and machinery up to a specified annual limit and covers the investment needs of 99% of the UK’s businesses.

The EIS will continue and the government is expanding the Seed Enterprise Investment Scheme (SEIS) to help more UK start-ups raise higher levels of finance. This package will help over 2,000 start-up companies access finance.

The Chancellor confirmed the introduction of investment zones which will have tax benefits, no national insurance and easier planning rules.

He will allow freeports to convert to new tax-beneficial investment zones as part of a package of 30 measures to grow the UK economy.

Investment Zones will offer generous, targeted and time-limited tax cuts for businesses. Mr Kwarteng confirmed that discussions are under way with 38 towns and mayoral areas in England and that investment zones will also be delivered in Scotland, Wales and Northern Ireland, though it will require further negotiations with the devolved governments.

The investment zones will also benefit from further liberalised planning rules to release more land for housing and commercial development, and reforms to increase the speed of delivering development.

“If we really want to level up we have to unleash the power of the private sector,” he said.

Markets plunge on borrowing concerns

The budget was even more expansionary than expected, reinforcing concerns over the impact on government borrowing with the deficit set to surge over the next year.

UK bonds fell sharply with markets also close to pricing in a further sharp rise in the interest rate at the November meeting.

The FTSE 100 index fell below 7,000 and at the close was down 140.92 points (1.97%) at 7,018.60. The pound slumped to fresh 37-year lows against the dollar to $1.105, below $1.10 for the first time since 1985.

Yields on benchmark UK ten-year bonds, which reflect the government’s borrowing costs, rose sharply to 3.8%, gaining 40 points within an hour of the chancellor’s statement and hitting their highest since 2011.

The National Institute of Economic and Social Research predicted interest rates peaking at 5 per cent next year as the Bank of England was forced to response “more aggressively”. But it also forecast that the tax cuts combined with the energy price cap would shorten the recession and push growth to 2 per cent next year.

BUDGET ANALYSIS

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