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The UK Chancellor of the Exchequer Rishi Sunak presented his Budget statement and spending review on 27 October. There have already been major announcements earlier this year of significant tax increases to take effect during the next two years.

These include higher corporation tax from April 2023 announced in a Budget statement in March; and last month’s announcement of 1.25% increases from next April in National Insurance contributions from employers, employees and the self-employed together with the same percentage to be added to income tax on corporate dividends. There were nevertheless some significant new announcements in the latest statement.

Support for businesses

The special government schemes supporting UK businesses during the pandemic will be wound down over the coming years, but some new announcements will be welcomed. These include several easements of business rates – the UK form of property tax for all non-residential premises. The UK government determines the details of these for England. In Scotland, Wales and Northern Ireland there are likely to be similar changes with the support of block grants with a corresponding cost from the UK exchequer; but any details there will be decided by the devolved administrations.

In England the major business rate concessions made this year for the sectors most hit by Covid lockdowns – retail, hospitality and leisure premises – will continue to a lesser extent in the 2022/23 financial year when these properties will receive a 50 per cent discount from normal rates. All properties will also benefit from the non-indexation of the tax rates next year, leaving their average incidence permanently 3 per cent lower as a result.

Revaluations of business property in England will become more frequent in future, taking place at 3-yearly rather than 5-yearly intervals from 2023. There will of course be both gainers and losers from this at any time. One permanent change will give relief for the first 12 months from the effect of any improvements made to a property.

The possibility of further business rate relief, at least for the retail trade, has been raised by the Chancellor, though in this case with no firm commitment. A consultation is to be issued shortly on the possibility of a new tax on online sales of goods to consumers, with the revenue to be used to reduce business rates. The government seems to be open minded on the idea at this stage, and it seems certain to be controversial.

The Chancellor confirmed that the recovery loan scheme (RLS), supported by government guarantees for commercial lenders, which had been due to finish at the end of this year, will be rolled forward until June next year at a reduced level. The maximum loan per supported business during the first half of 2022 will be £2 million, and the rate of the guarantee for loan advances from 1 January 2022 will be reduced from 80 to 70 per cent.

Simon Goldie, Director of Business Finance at the Finance & Leasing Association, gave this move a cautious welcome. He said: “This provides some certainty on business funding for the time being, albeit with a lower guarantee rate, but a permanent successor to the RLS must be developed.

“We have recommended that a permanent scheme should retain the best features of the RLS – but it should also mirror the abiding principle behind the Enterprise Finance Guarantee asset finance variant, which was designed to ensure that lenders could provide funding for either assets or businesses that were outside of their usual risk appetite. This was a very successful way to get funding into every corner of the economy.”

Corporation tax and banks

As announced in March, the main corporation tax rate is due to rise from 19 to 25 per cent from April 2023. For banks, there will at the same time be some relief from the corporation tax surcharge they have suffered in recent years. Whereas currently the rate for banks at 27 per cent is 8 per cent higher than for other companies, from 2023 their tax rate will be 28 per cent, an effective surcharge of 3 per cent.

This will make it slightly easier for banks in competition with non-banks in markets such as asset finance. Some new players in the UK banking market will also benefit from an increase in the annual profit threshold above which the surcharge applies. This will rise from £25m to £100m per bank.

Annual investment allowance

The annual investment allowance (AIA) permits 100 per cent first year tax write-offs, in place of the normal annual writing down allowances (WDAs) for the first tranche of annual capital expenditure on plant and machinery by all businesses. It thus gives substantial benefit to small firms. The current enhanced AIA amount of £1 million per business, which has been in place since 2019 and had been due to end next year, will now be extended for a further year. It is now due to revert to the permanent annual rate of £200,000 per firm from April 2023.

Equipment leases cannot benefit materially from AIA, since it is not available to assets leased in by firms who could claim it if they purchased plant outright. However, on contracts where the lessee or hirer, rather than the finance company, claims capital allowances – i.e. hire purchase deals or “long funding leases” as defined in tax law – equipment users are able to benefit from AIA.

Ship tonnage tax

Among the relatively few new tax changes for the years ahead announced this time, the Chancellor has made some changes to the optional tax regime for ship owners known as tonnage tax. First introduced in 2000, this conditionally allows shipping lines to be taxed at

low rates based on a ship’s tonnage, rather than on a profit basis under normal corporation tax rules. The main change, made possible by the UK’s exit from the European Union, is that in future ships eligible for tonnage tax will have to be registered in the UK rather than in any EU member state.

Within the EU, Greece and Cyprus are quite widely used internationally as “flags of convenience” for national shipping registries, due to regulatory advantages outside of the tax system. Though they are both used on a much smaller scale than the global leaders in ship registry (Liberia and Panama); those EU registries will be affected by the new rules for shipping lines that are managed in the UK and thus subject to UK corporation tax, where these are “flagged in” to the UK to remain eligible for tonnage tax.

Not all UK shipping lines opt into tonnage tax. Due mainly to the favourable general UK tax write-off rates for ships (which is not usable in the non-profit-based tonnage tax regime), many UK shipping lines can accrue tax losses over substantial periods if they are not opted into tonnage tax. They can then utilise these losses under group relief if they also have non-shipping interests in their corporate groups.

Where a shipping line is under tonnage tax, it is possible for a leasing company to claim capital allowances (CAs) to a limited extent on ships leased to those operators. The Chancellor has now announced that the government will consult shortly on possible changes to the financial limits for these CA claims by lessors. Currently they are limited to £80m per vessel, and are normally at the 8 per cent annual WDA rates applicable to all “long life assets” (i.e. those with a useful life of 25 years or more).

One further change now announced on the tonnage tax is a reduction from 10 to 8 years in the “lock-in” period, for which each UK shipping line must remain opted either in or out of the tonnage tax. This will add some flexibility to the scheme.

Motor vehicles

There were no major new announcements on the tax treatment of vehicle fleets. It was confirmed that income tax rates for company car benefits will be frozen for the two tax years up to 2024/25, as first announced last year. Car fuel benefit rates will nevertheless be indexed for inflation next year, as will all the vehicle excise duty rates.

Tax rates on motor fuel will remain frozen for the twelfth successive year in 2022/23, which will give some relief to vehicle users and operators after the current surge in global pre-tax prices.

The economic and fiscal context

The latest estimate for UK gross domestic product (GDP) in 2nd quarter 2021 shows a 3.3 per cent drop from the pre-Covid peak in 2019. This represents a much better outturn compared with the 7.9 percent drop forecast over the same period at the time of the Budget statement last March. All the growth figures are calculated “in real terms”, i.e. after allowing for inflation.

The UK position on this comparison is in line with that of most OECD countries, though not as good as in the US where the economy is already showing some growth from 2019.

The independent Office of Budget Responsibility (OBR) now forecasts that UK GDP will be back to its pre-Covid level by the end of this year. It suggests that the lasting effect of the economic damage resulting from the pandemic will be to leave GDP just over 2 per cent lower in any subsequent period than if the pandemic had not occurred; but it acknowledges that there is “considerable uncertainty” on this assumption.

The OBR's estimates and forecasts for GDP in complete calendar years suggest that a 9.8 per cant fall in 2020 will be followed by recoveries of 6.5 per cent in 2021, and 6.0 per cent in 2022. They then suggest a return to something like the long term trend, with further growth of 2.1 per cent in 2023 and between 1.3 and 1.7 per cent in each of the following three years.

Within overall GDP, business sector fixed investment is estimated to have fallen by 10.9 per cent in 2020, with a further 2.4 per cent drop this year. A strong recovery of 15.7 per cent is forecast for 2022, followed by further 4.7 per cent growth the next year. Another small dip is forecast in 2024, with a drop of 0.8 per cent perhaps reflecting the ending of the tax “super-deduction” for corporate capital expenditure on plant an d machinery - but with healthy annual growth of around 5 per cent in each of the following two years.

The volume of UK consumer spending is assumed to be already on a recovery path, fuelled by a growth of 3.4 per cent in real wages by 2nd quarter 2021 compared with their pre-pandemic level in February 2020. After having fallen by 10.9 per cent in calendar year 2020, consumer spending is forecast to grow by 4.7 per cent this year, with a sharp upturn of 9.8 per cent in in 2022 (in spite of the tax increase), then returning to annual growth in the range of 1.0 to 1.7 per cent in each of the next four years.

HM Treasury's Budget day analysis suggests that the discretionary fiscal expansion in the UK during the pandemic lockdown periods, financing the furlough scheme and other temporary support for businesses and consumers, has been the highest among all the major OECD countries except the US. Some analysts suggest that this fiscal and monetary expansion, in both the UK and international contexts, is fuelling the current upturn in inflation.

It certainly seems clear that in the UK, the ending of EU-wide free movement of labour through Brexit, with other factors critically affecting the labour supply in some sectors, is combining with international developments such as the pressure on gas supplies to push up costs and prices. The OBR forecasts that UK annual inflation will reach 4 per cent next year, though other forecasters put it at 5 per cent or more. The Chancellor has retained the 2 per cent annual inflation target for the Bank of England's exercise of monetary policy- though some divergence in individual years is tolerated, and the target has been somewhat undershot in most recent years.

Public sector net debt as % of GDP is now forecast at 96.1 per cent in the current financial year, rising to a peak of 98.2 per cent next year. Significant reductions are aimed for from 2024/25 onwards through the effects of forecast economic recovery as well as higher tax rates. By 2026/27 the ratio is forecast to be down to 88 per cent. However, before the financial crisis in 2008 the comparable national debt ratio was less than 40 per cent of GDP.

In these conditions the Chancellor acknowledged “the extreme sensitivity of the public finances to changes in interest rates.” He pointed out that the fiscal impact of a 1 per cent increase in interest rates by next year is calculated to be six times higher than before the 2008 financial crisis, and almost twice the pre-pandemic level.

This effect is partly the result of quantitative easing, in addition to the higher gross national debt level. Through QE a significant part of the national debt is now owed by the Bank of England to commercial banks in the form of their reserve balances at the Bank, where borrowing costs will respond immediately to any increase in the Bank's “policy rate”, rather than being funded through long term gilt edged securities.

Annual public sector net borrowing rose as high as 15.2 per cent of GDP in the 2020/21 financial year. This is planned to fall to 7.9 per cent this year, and then to 3.3 per cent in 2022/23. By 2024/25 the government aims to borrow only enough to fund annual public capital expenditure.

The public spending review within this year's Budget outlines a commitment to considerable medium term growth in expenditure over the current period, disregarding the exceptional peak during the pandemic. The real volume of public spending is planned to grow at an average of 3.8 per cent a year over the five years to 2024/25. This of course follows a long period of severe restraint in many sectors since 2010, following the financial crisis which decimated tax receipts from the UK financial sector after 2008.

The overall tax burden (as indicated by public sector net receipts as % of GDP) is scheduled to rise from 37.2 to 40 per cent of GDP over the five years to 2026/27. This will leave it at the highest rate since the 1950s. The Chancellor hinted that he would like to be able to announce some tax reductions towards the end of this forward planning period if the economic performance allows. However, there is no guarantee that this will be possible.