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Tuesday, 04 October 2022 / Published in Uncategorized

The Chancellor Kwasi Kwarteng has confirmed that the government has U-turned on its plans to scrap the 45p rate of income tax

Kwarteng announced the U-turn on Twitter this morning, saying: ‘We are not proceeding with the abolition of the 45p tax rate. We get it, and we have listened.

‘It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country.

‘This will allow us to focus on delivering the major parts of our growth package’, including the Energy Price Guarantee, ‘to support households and businesses with their energy bills’. 

The plan was announced in the tax-slashing mini-budget last Friday, which included scrapping the 45p tax rate, which would cut tax by 5% to 40% for those earning over £150,000 a year. 

However, the plan was criticised as unfair amid the current cost-of-living crisis, and required a vote before it could be approved. 

Several Tory MPs have voiced their criticisms of the plan, including Grant Shapps who warned that the prime minister would likely lose a Commons vote on the proposal.

Shapps told the BBC: ‘Let’s not muddy the water with tax cuts for wealthy people right now, when the priority needs to be on everyday households.’

The news follows as the tax cuts in the mini-budget was criticised by the International Monetary Fund (IMF) on Friday, which warned it would stoke ‘inequality’ and risked increasing interest rates, as well as benefitting high income earners. 

The Bank of England also reacted with a £65bn emergency intervention in temporary and targeted purchases in the gilt market to restore ‘orderely market conditions’ and prevent a ‘material risk’ to UK financial stability. 

Jamie Morrison, head of tax at accountancy firm HW Fisher, said: ‘It was a bold move by the Chancellor to cut the top rate of income tax in his mini-budget – and one that has not paid off.

‘Tackling the UK’s cost of living crisis should be the government’s top priority, and it was hard to see how the abolition of the 45p tax rate would have benefitted anyone apart from the UK’s highest earners.’

The pound jumped against the dollar in overnight trading on Monday as reports emerged that the government would abandon the decision to axe the 45p tax rate.

Sterling hit $1.125, recovering to levels before the mini budget, but slumped back in early morning trading to $1.119.

Christy Wilson, associate at Katten UK LLP, said: ‘The removal of the 45% income tax rate was not anticipated before the budget. There was discussion that the Chancellor may announce some amendments to the income tax rates, including the higher rate income tax threshold being moved to £80,000 – but the removal of the 45% tax band was unexpected. 

‘Even though the government has maintained since the budget that the tax cuts were the correct approach for economic growth, it is not surprising that the government felt compelled to make some amendments to the announced tax cuts given how serious the backlash to the budget has been. 

‘The concerning element of this ‘u-turn’ is that only a couple of days ago Liz Truss and the Chancellor maintained that cutting the 45% income tax rate was the right thing to do, but now they have abandoned these plans. This calls into question other tax cuts that were announced – will these be reversed too?’ 

Paul Johnson, director of the Institute for Fiscal Studies (IFS), added that the decision to scrap the 45% rate on earnings was the ‘smallest part’ of the mini-budget, representing around £2bn of the £45bn in tax cuts. 

‘The direct impact of the government’s U-turn on the abolition of the additional 45p rate of income tax is of limited fiscal significance. At a medium-run cost of around £2bn a year, it represented only a small fraction of the Chancellor’s mini-budgest announcements. His £45bn package of tax cuts has now become a £43bn package – a rounding error in the context of the public finances. 

‘The Chancellor still has a lot of work to do if he is to display a credible commitment to fiscal sustainability. Unless he also U-turns on some of his other, much larger tax announcements, he will have no option but to consider cuts to public spending: to social security, investment projects, or public services.’

Monday, 26 September 2022 / Published in Corporation Tax

As trailed, the Chancellor confirmed that the planned 6% rise in corporation tax will not go ahead in April 2023 with rates set at 19%

The current 19% corporation tax rate was confirmed in Kwasi Kwarteng’s statement to the House, which he said means that the UK has the lowest corporation tax rate in the G7.

The measure will reduce projected tax take by £13.5bn in 2023-24, rising to £16.5bn in 2024-25.

The Chancellor said that ‘competitive business taxes are important to growing the economy as they can incentivise investment and enterprise. The government wants to grow the economy by creating the conditions for businesses to thrive, which will create jobs and increase investment in the UK’.

Matthew Hodkin, tax partner at Norton Rose Fulbright, said: ‘The new Chancellor has announced a reversal of the planned increase in corporation tax from 19% to 25%. While this would appear to be a “nothing” announcement – as the 25% rate had not yet come into force – there are likely to be knock-on effects for companies having to deal with the accounting implications of the reversal.

‘Given the timings, companies would have already been making changes to their accounts to prepare for the increase to 25%. Banks will be disappointed (but not surprised) that the bank surcharge has not been reduced.

‘This can have knock-on effects on the level of deferred tax assets and liabilities, which affect companies’ balance sheets and can be of particular concern to banks, insurance companies and other regulated businesses that are required to maintain a certain level of regulatory capital on the balance sheet. It can also affect other liabilities that are tax-variable, such as payments under tax-based finance leases, where the net present value of the impact of changes can be brought through the income statement of the lessee.’

Glenn Collins, head of ACCA said: ‘“The government’s decision to keep corporation tax at 19% will encourage businesses to invest. With the main rate of corporation tax previously set to increase to 25% next April many businesses were becoming more nervous already feeling the strain of a rise in inflation, cost of living and energy prices, putting unnecessary pressure on businesses. Now more than ever businesses are looking at the ease of doing business and where investment opportunities lie.’

Tuesday, 20 September 2022 / Published in Budget

The Chancellor Kwasi Kwarteng is likely to present his fiscal statement to MPs on Friday 23 September, although this is not confirmed.

As parliamentary time is hugely limited by the Queen’s funeral and then the party-political conference season, the Chancellor has only a few options to update MPs and the country on a number of pressing issues, from how the energy bill support will be financed and whether the promised reversal of the 1.5% National Insurance contributions (NICs) hike will go ahead.

The energy bill support will kick in from 1 October for households with little detail available as yet about the plans to help business with soaring energy bills. Yesterday there were indications that detailed plans for business will not be available before the beginning of November, although any measures will be backdated to the beginning of October for businesses, important as the support will only last for six months.

It is worth noting that any changes to NICs would not be instant as they would require the third update of the year to HMRC systems and PAYE software. Some experts are indicating that a minimum of two to three months would be required to ensure a smooth transition to the lower rate. It is also not clear whether the NICs reversal will include employer NICs on top of the employee changes.

The autumn should see a full Budget so it gives the Chancellor some leeway as he could limit any announcements next week and hold them for late October or early November, whenever a Budget is scheduled. This would also give the Office for Budget Responsibility the time to produce a full economic forecast, which takes around 10 weeks to produce.

Wednesday, 14 September 2022 / Published in Uncategorized

The UK economy saw growth of 0.2% in July, following a sharp fall of 0.6% in the previous month, according to the Office for National Statistics (ONS)

The UK economy grew slower than expected in July as worker shortages and inflation weighed heavily on activity amid the growing risk of recession. 

According to the ONS, gross domestic product (GDP) rose by 0.2% in July, after a sharp fall of 0.6% in June 2022. Though 1.1% above pre-coronavirus levels, GDP was flat in the three months to July compared with the previous three months.

The services sector was the biggest contributor to growth, seeing a rise of 0.4%, following a 0.5% drop between May and June.

Yael Selfin, chief economist at KPMG UK, said: ‘The feeble 0.2% bounce back in July was driven by weak GDP in June due in part to the loss of working days from the Jubilee long weekend.

‘More concerning, July’s GDP remains below the level seen in May, pointing to an overall contraction over the first two months of summer.

‘This ties into a downbeat outlook for the UK economy which could see another shallow recession from the end of this year, driven by the ongoing squeeze on households’ income and a rising cost burden for businesses

‘While nearly £170bn worth of fiscal measures announced last week may be sufficient to avoid a deeper economic slump, these will be partly offset by tighter Bank of England monetary policy focused on combating the high levels of inflation.’

The figures come amid growing concerns over Britain’s economy as soaring inflation and rising costs weigh heavily on households and businesses. The Bank of England warned that the UK will likely fall into recession at the end of the year, which could last until early 2024.

The information and communication sector grew by 1.5%, the largest contributor to services growth in July. The main driver was computer programming, consultancy, and telecommunications.

Production fell by 0.3% after a fall of 0.9% in June, mainly because of a drop of 3.4% in electricity, gas, steam, and air conditioning supply.

Jake Finney, economist at PwC, said: ‘Looking beneath the headlines, it’s clear this positive growth rate was primarily led by the performance of the services sector. Two of the other main engines of economic growth – production and construction – contracted in July.

‘Despite today’s positive growth figures, our expectation is that the UK economy will contract in the third quarter of 2022, following its 0.1% contraction in the second quarter. This would mean that the UK enters a technical recession for the first time since lockdown restrictions ended.’

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