Mini-Budget U-turn – what does this mean for entrepreneurs

After six of the most tumultuous weeks in Government it is all change for the mini-budget announced by Kwasi Kwarteng on 23 September. We originally published an article on 30 September 2022 discussing the impact of the then Chancellor’s proposals. No sooner had we done so, when nearly all of the tax changes that had been introduced as part of Prime Minister Liz Truss’ growth agenda, were unceremoniously dumped by the new Chancellor, Jeremy Hunt.

We now discuss where we have got to in relation to all of these changes.

As soon as the mini-budget was announced, UK markets reacted with volatility, the like of which we rarely see. The pound plummeted to a record low and the UK economy was plunged into chaos. It was therefore expected that the Government would make some changes. Quite how far they would go has surprised many.

On 17 October 2022 Jeremy Hunt delivered his Emergency Statement. He announced that the “central responsibility of any Government is to do what is necessary for economic stability”. He went on to perform a complete U-turn for the Government, and proceeded to scrap many of the tax reforms which were announced by his predecessor just days earlier.

Chancellor Hunt’s announcement was intended to restore confidence in the UK markets. To some extent, thus far it seems to have done so, although undoubtedly a lot of damage has already been done and this will take some time to correct. Time will tell if the markets have calmed on a medium/long term basis, rather than just as an immediate reaction to the marked change of direction that we have seen.

So which of the tax reforms in the growth plan have remained and which have been scrapped?

The reforms that remain

1. National Insurance – from 6 November 2022 the national insurance increase of 1.25% (on earnings) will be reversed;

2. Annual investment Allowance - from April 2023 the £1 million level of AIA will be made permanent. So businesses can deduct 100% of the costs of qualifying plant and machinery up to £1 million in the first year;

3. Investment zones – thus far these have not been explicitly addressed so there does remain some uncertainty as to whether they will indeed be created, scaled back or scrapped altogether. They have been designed to create zones which will benefit from tax incentives and planning liberalisation. In questions after his statement Jeremy Hunt was challenged on whether these zones worked and said they would remain, though (a few days later) Michael Gove has now indicated he is “reviewing them”.

4. Seed Enterprise Investment Schemes (SEIS) – as with investment zones, the Government has been coy as to what will happen to these. SEIS (and Enterprise Investment Schemes or EIS schemes) were not mentioned in the recent announcement. However, it is understood at the time of writing, that these are going to remain in force. The reforms to SEIS announced in the mini-budget mean that from April 2023 companies are going to be able to raise up to £250,000 under the scheme. The gross asset limit will increase to £350,000, the age limit of eligible companies will increase from 2 to 3 years and the cap for investors will be doubled to £200,000.

Reforms which have been scrapped

1. Income tax – the basic rate of income tax will not now be cut. The basic rate will remain at 20% and the higher rate at 40% “indefinitely”. The 45% “additional” rate of income tax will remain;

2. Dividend tax – the 1.25% increase which came into effect in April 2022 had been due to be scrapped. The dividend rate will therefore remain at 8.75%, 33.75% and 39.35% for a basic rate, higher rate and additional rate taxpayer, respectively;

3. Corporation tax – the proposed rise to 25% will now go ahead, as had previously been planned from April 2023. This will be for businesses with profits of more than £250,000. Businesses (other than investment companies, though there is a carve out for companies investing in real estate) whose profits are below £50,000 will not now see any change. They will continue to pay 19% corporation tax. Those with profits between £50,000 and £250,000 will pay a marginal tax rate;

4. IR35 reforms – these are not now going to be repealed. Responsibility for assessing IR35 status will remain with the engaging company (if it is sufficiently large) rather than the worker’s personal service company.

Many entrepreneurs will be pleased to see at least some tax reforms have remained, the SEIS and the proposed investment zones among them, even if the majority have been withdrawn.

As discussed in our previous blog SEIS promotes investments into startups and early stage companies by providing tax breaks for investors that back them. SEIS is primarily used for investment into startups which are at a very early stage, and therefore seen as more risky investments, whereas EIS is used for investment into slightly larger and more mature companies. To reflect the risk SEIS offers investors greater tax reliefs when compared with EIS (50% as opposed to 30% income tax relief) albeit the amount investors are able to invest under SEIS is less. As discussed above SEIS reforms have increased the amount companies can raise to £250,000, increased the age limit of eligible companies to three years and increased amount individual investors can invest to £200,000. In comparison the amount companies can raise using EIS (ignoring “knowledge intensive companies”) is up to £5 million per tax year (and no more than £12 million EIS funding in total), individuals can invest £1 million per tax year and the age limit for qualifying companies is 7 years. Investing into a startup company will be seen by many as risky however these tax incentive schemes are seen to de-risk the investment for the individual investor, thereby making the investment more attractive, and without such schemes startups and early stage companies would find it much more difficult to raise money. The SEIS reforms will encourage more investment into particularly early stage companies and the additional year allows new companies to offer a slightly more stable (and attractive) investment proposition to potential investors.

The proposed investment zones have been designed to create zones which will benefit from tax incentives which may include business rate reliefs, enhanced capital allowances for a period of time, reliefs on employer national insurance contribution and planning liberalisation. The zones are aimed at providing wide support for the local economy so from the Entrepreneur’s perspective these new zones may be attractive if they are thinking of setting up a company as they will benefit from the tax incentives and will assist with keeping expenditure as low as possible. However, the detail around what is planned for these zones has yet to be explained, and there is concern about how much the zones could cost the Treasury in lost tax. One preliminary estimate has apparently put this as high as £12 billion. So time will tell if the Government keeps to its previous promises to create these zones or scales back the tax incentives in some way. They may even decide to scrap them altogether. 

Although some of the remaining tax reforms may benefit entrepreneurs, they are still likely to be greatly affected by those which have now been scrapped. The rise in income tax rates in particular may be an issue. Small business owners are no longer going to be able to benefit from the lower dividend tax rates as the 1.25% increase has remained.

The rise in corporation tax will primarily affect businesses (other than investment businesses) earning significant profits. Those businesses with profits under £50,000 will continue to pay tax at the rate of 19%. So the increase in corporation tax may not impact start-up companies to the same extent.

As the tax returns promised to entrepreneurs are not quite as ground breaking as first thought, it will be important for start-ups to consider carefully any relief, funding and incentive arrangements available to them.

It is estimated that Chancellor Hunt’s announcement will raise an additional £32 billion in tax receipts. Whether this will be enough to quieten the criticism of the Government, and restore confidence in UK markets remains to be seen. The medium term fiscal plan will be incorporated into an Autumn Statement which will be delivered on 17 November. Rishi Sunak has now won the contest to be Prime Minister (at the second time of asking). How he and his newly re-appointed Chancellor Jeremy Hunt will shape their future budget announcements, and whether we will see a return to previous Government economic policy, remains to be seen. But whatever the future course of events in that respect, it does remain the case that there are significant opportunities out there for entrepreneurs and the Government is not going to want to stifle their endeavours for too long...