Autumn Statement 2023 Wishlist

Ahead of his Autumn Statement on Wednesday 22 November, the Chancellor has repeatedly stated that tax cuts are impossible, however other tax measures and spending policies could still be on the cards.

Jeremy Hunt is facing a major financial headache as he contemplates what to do, firstly in the forthcoming Autumn statement due on 22 November and secondly, for the Budget due next Spring.

Tax Partner, Patrick King comments “’Steady as she goes’ may be an option for the time being as the UK has (so far) avoided a recession and inflation is falling, (albeit slower than hoped), but a bold plan to incentivise investment and aggressively seek increased productivity must surely be needed very soon”.

Below, our tax and industry specialists share their insights on potential areas for the Chancellor to introduce new measures and policies, that could benefit businesses and households.

Simplifying ISA’s

The current system of Isa savings accounts could be reviewed to make it easier for customers to invest their money.

Independent Financial Planner, Gary Doolan, explains more, “With six different types of Isa available presently with different aims and rules. A new system allowing people to hold both cash and investments in one Isa account would demystify this tax-free allowance.

The overhaul of the Isa system could also include increasing the annual Isa tax-free allowance from £20,000 to £30,000 - but only for savers that open a stocks and shares Isa. Investors may perhaps have to place some of the additional allowance into shares, in keeping with the government’s aim to encourage investment into British businesses”.

State Pension Review

Pensions and benefits are always a focal point of any financial statement. There are rumours the Treasury is considering plans to amend the 'triple lock'.

The triple lock has been in place since 2010 and guarantees pensions will be boosted by either September’s inflation, earnings growth (from the period between May to July) or 2.5% - whichever is highest. Based on current wage growth figures, it would mean a rise of 8.5% from April 2024.

However, the government may decide to exclude bonuses from its earnings growth calculation, thus lowering this figure to 7.8%. The move could reportedly save the government around £1bn. Any amendment to the triple lock rule would be controversial, and the Conservative party did promise in their last election manifesto not to tamper with the formula.

Inheritance Tax – Abolish or Reform?

As we look towards what may be the final Autumn Statement before a general election, we cannot ignore recent speculation of possible changes to Inheritance Tax (“IHT”).

We’re yet to understand what any change may be, and no decision is expected until 2024. Nevertheless, a complete abolition of IHT would leave an annual gap of at least £6bn in the public purse. If we are to see reform of IHT rather than a complete abolition, one possibility is for a tightening of IHT Business Relief to fund IHT cuts for others. Business Relief is aimed at avoiding the need to break up businesses to pay IHT when the owner dies, one view being that this is better for overall economic prosperity and therefore of wider public benefit.

Kirsty Foster, Associate Director at MHA, comments, “The possibility that IHT reform could instead shift the IHT burden to different groups of people, could lead some to review their finances and seek to pass on assets under what is currently a relatively favourable tax regime for such transfers. Therefore, it may be prudent for taxpayers to review their affairs now, rather than waiting for changes which may, or may not be coming down the track.”

Read Kirsty Foster’s full comment here

Business Taxes & Corporation Tax

What would companies like to see announced in the forthcoming Autumn statement?

Surprisingly, one of the top things on a business owner’s wish list may not be a tax cut at all, or any new measure, but quite simply a wish that HMRC do what it is already doing, but better. There have always been complaints that HMRC offer a poor service and are slow to respond to taxpayers, but since the pandemic the delays have increased hugely, with frustrated business owners waiting hours on the phone to speak to a HMRC representative, or even worse, waiting many months for HMRC to deal with a letter or claim. An increase in resourcing, with more staff able to answer the phone and deal with cases would be very much welcomed by businesses of all sizes.

In April, the ‘will-they-won’t-they’ flip-flopping on corporation tax rates finally ended when the corporation tax main rate was increased from 19% to 25% - a bitter pill for businesses already struggling with high inflation and economic slowdown to take.

Steve Haywood, Associate Tax Director explains “Despite calls from some in his party, it is perhaps too much to expect that the Chancellor will reverse course and reduce the corporation tax rate. A more realistic wish is to increase the threshold below which small businesses pay the small business corporation tax rate of 19%. The last time we had two tiers of corporation tax rate, businesses only paid the higher rate on profits above £1.5m. This time around higher rate corporation tax is paid by businesses where profits exceed a comparatively small £250,000. With the reintroduction of the associated companies regime potentially reducing this even further, few companies will be paying corporation tax at the lower rate of 19%. Increasing these thresholds would go a long way towards easing the burden for a large number of our smaller companies”.

The frozen VAT registration threshold

An increase in the VAT registration threshold would be a very welcome boost to many small businesses and would encourage growth for thousands of small firms, says Carolyn Van Hecke, Associate Tax Director at MHA.

Historically the VAT registration threshold has increased every year, broadly in line with inflation. However, it has remained at its current level of £85,000 since 1^st April 2017. Current policy is that it will remain at the same level until at least March 2026. We understand that this is expected to raise an extra £1.4 billion VAT revenue each year as more businesses will be brought within the VAT system. Had the inflationary increases been applied, the threshold from April 2023 would now be in the region of £103,000. The freezing of the VAT registration threshold has effectively lowered it.

Whilst there are some benefits to being VAT registered including the ability to recover VAT on eligible expenditure, some businesses may simply not be in a position to pass on the VAT to their customers and effectively increase prices by 20%. This means that some or all of the VAT will have to be absorbed and will represent an additional cost. Typically, this will mostly affect sole trader businesses supplying domestic consumers directly – hairdressers, plumbers, electricians etc.

Not only can the VAT itself be a financial burden, but there is also the administrative time cost of preparing and filing VAT returns, VAT inspections and additional administration involved. Proportionally this represents a higher cost to a small business.

This has resulted in many small businesses choosing not to grow but managing their turnover, rather than exceeding the VAT threshold.

Fix the broken Bank Referral Scheme to improve access to finance for SME’s

Fast-growing companies need finance to hire talent and develop their product offering, otherwise, they will rapidly fall behind their competitors as other countries take the initiative, potentially damaging the UK’s economic growth.

A recent survey of SME’s by Praetura (Called ‘Fund The Gap’) found that for 43% of business owners, access to funding is one of the biggest challenges they currently face. SME’s have reported increasing frustration at not being able to secure the capital they need: 73% say that institutional lenders have failed to take the time to properly understand their businesses.

The Government launched the Bank Referral Scheme back in November 2016, which requires nine of the UK’s biggest banks to pass on the details of SME’s that they have turned down for finance, to three Government designated finance platforms. However, the scheme does not meet the needs of UK businesses in 2023, as their requirements are more complex than can be captured by this process.

Head of Banking & Finance at MHA, Greg Taylor, states that “It’s already clear that if work is not done to improve access to finance, the SME landscape will continue to worsen. This is why the Bank Referral Scheme needs a rethink, a rebrand and a relaunch – something that the Chancellor must address in his Autumn Statement."

Read Greg Taylor’s full comment here

R&D Tax Reliefs

Ahead of new rules already coming into force in April 2024 (which were announced in the Spring Budget 2023, what else could be on the table for R&D?

Senior Tax Manager at MHA, Lee Pimlett says, “We could see the SME and Large RDEC schemes combined into a single simplified RDEC based scheme. The new single RDEC scheme would therefore be an Above the Line (ATL) income source within the Company Accounts and move away from being a Corporation Tax Computation adjustment. This may drive the R&D process to be undertaken in line with the preparation of the Accounts. A single scheme will limit the possibility of both a payor and subcontractor double claiming on a single project under the two different schemes.

A restriction on the use of overseas sub-contractors could be introduced, therefore severely limiting any expenditure incurred on these services on projects undertaken, especially when combined with the already hugely restricted qualifying criteria for subcontractors under the RDEC regime.

Another potential change is that repayable tax credits payable will be limited to £20,000 plus 3x the companies PAYE and NIC contributions (the system which currently exists for SME Tax Credits)”.

Other possible measures for R&D could include:

• the introduction and extension of further special R&D schemes or tax credit rates for development intensive firms.
• the introduction of minimal expenditure value claim.
• claiming both state aid/grants and RDEC on the same project.

A plan to stimulate investment in UK manufacturing

The UK continues to lag behind other performing nations in the level of investment and cannot afford to be left behind. This includes "traditional" investment alongside investment in newer fields such as renewables and AI. This could be achieved by providing further support with fiscal measures such as enhanced capital allowances (targeted if necessary to certain areas), and others such as government-backed asset funding programs to combat the dampening effect of increasing interest rates.

Other measures the Chancellor could consider for the industry are:

• a cut in corporation tax to help improve the position of the UK as a centre for business. The industry needs some stability - the constant changes in tax, and most recently in terms of emission targets make life difficult and give very mixed messages.
• A reversal of the most recent R&D changes would be welcome – these changes have unfairly impacted SME's in an area where they should be helping.
• An industrial strategy (akin to that in other countries and previously in the UK) which is non-political and values and encourages the contribution of the sector to the UK economy.

One Key Measure for Employee Ownership Trusts

Currently, when an EOT sells a company’s shares it will have to pay capital gains tax (CGT) at 20% on the gain. The issue arises when the EOT trustees then pay the net proceeds onto the employees who are beneficiaries of the EOT. The employees will then need to pay income tax and NIC on the whole of the net proceeds paid to them, whilst the employer will additionally have an Employer’s NIC bill on the sums paid to the employee beneficiaries. This is essentially double taxation for which there is currently no relief. It is for this reason that many companies setting up EOTs have chosen to locate them outside the UK to prevent this double taxation.

HMRC’s Consultation Document issued in July this year proposed preventing the trustees of an EOT being resident outside the UK so that they would always be liable to 20% CGT were they to sell the company’s shares they own. If this measure is brought in, HMRC need to bring in measures to eliminate the double taxation. Chris Blundell, Partner at MHA, explains, “Unlike with dividends, where trustees of an EOT pay the net proceeds out to the employee beneficiaries, they can’t reclaim any of the CGT they have had to pay. This needs to change if EOTs are to continue to be used to pass businesses on to their employees”.

Read Chris Blundell’s full comment here

Measures for the Automotive industry

Whilst not necessarily a fiscal request the sector needs to negotiate a concession to the proposed rules of origin legislation that comes into play in 2024. If implemented as intended, this regulation will impact car exports from the UK and imports to the UK by potentially incurring a 10% tariff on vehicles which are deemed to be in breach of the domestically sourced content minimum value. This will disadvantage the likes of Vauxhall, Nissan, Toyota, BMW/Mini production of electric vehicles as batteries are a significant cost in the bill of materials and are almost exclusively imported. This will also make imported EV from Europe more expensive at a time where they need to be made cheaper in order to stimulate retail demand in line with the ZEV mandate.

We need more investment incentives to develop battery production in the UK. This will not only make UK produced vehicles more competitive but if the UK is to meet it's 2050 Net Zero commitments, we will have to develop energy storage capacity to help load balance the grid, maximise renewable output, and reduce energy bills.

A key area for the government to look at is the VAT charge on public charging. Partner at MHA, Alastair Cassel comments, “Despite the recent PM statement regarding a delay to the banning of selling new ICE vehicles, the ZEV mandate remains unaltered in its mission to drive an acceleration to EV adoption. This means that EVs have to be made more attractive to buyers and in particular private buyers. We have significant investment being made in charge points and a reduction in VAT to parity with the domestic electricity rate of 5 % would help with the total cost of ownership cast and also would continue to encourage further infrastructure investment.

There should be some consideration given to potential tax breaks for private buyers. EV uptake is currently very heavily biased to fleet and company car drivers due to the low BiK taxation rate and availability of a capital allowances. These are not available to the other 1m new car buyers and as such "retail" demand for EVs is soft”.

Key measures needed for Constructions & Real Estate

1. Abolish SDLT for first time buyer and downsizers.
2. Establish a toll system so anyone that does not live in Cornwall but travels there, must pay a toll that provides affordable living in the County.
3. Reinstate EPC targets for residential sales – they must have on sale a “C” if not additional 3% SDLT charged and repaid when work has been done.
4. Increase funding for infrastructure Roads, hospitals, schools, battery factories, wind power, electricity supply, etc.
5. Determine locations for Garden Villages (a la Enterprise Zones- for commerce) such that there is financial and infrastructure support.
6. Create a National Planning team (working with Homes England?) to support under resourced local authorities.
7. Reverse restricted interest tax relief on BTL.
8. Annual wealth tax on residences worth more than £5mn – funds to go to affordable living.
9. Raise IHT bands from £325k to £500k.

AFF, ESG & Green Initiatives

Mark Lumsdon-Taylor, Lead Partner for the MHA Dynamic ESG programme, considers the key measures below to benefit the Agriculture, Forestry and Fishing industries, and also takes a look at initiatives to progress ESG and green policies.

Measures for Agriculture, Forestry and Fishing industries

• The commercial horticulture strategy needs to be reprised - including the SAWS Workforce. Actually, talking about this for once would be a good point.
• Announce a two-year pilot to turn the Apprenticeship Levy into a ‘Skills Challenge Fund’.
• Temporary VAT Reduction for hospitality & Catering (to 15% - for example).
• APR To remain in place until March as a minimum - otherwise it could be a disaster for the sector.
• Careful and ongoing consideration of the impacts of the transition to ELMS.
• Longer term certainty on government green policy. Recent U-turns on BNG and net zero are unhelpful for an industry which is being asked to see green industries as a source of income and opportunity.
• Support for fair value and fair dealing throughout the supply chain - investment into the technical aspect of Transparency in the chain.
• Food security/self-sufficiency ambitions: Incentivise business to grow for greater engagement.

ESG & Green Initiatives

• A program of regulative structures for the cascade of ESG Regulatory reporting to large businesses, in a logical and structured way - minimising bureaucracy and reclaim leadership of integrated reporting.
• Alignment to EU Taxonomy.
• Introduce a targeted green super deduction for both incorporated and unincorporated businesses (120%) - to aid in net zero transition.
• Appropriate frameworks in place for tax transition to net zero including guidance on treatment of climate risk surrounding deferred taxation.
• Remove the uncertainty around carbon credits / carbon trading - and adopt the EU robust stance on zero tolerance for green washing in corporate reporting.
• The UK has the opportunity to become an AI superpower – which requires a world-leading AI governance ecosystem. ESG AI investment would ensure the UK becomes a lead – There needs to be a consideration that digital regulators are appropriately resourced for the long term, to support the imminent and future pro-innovation regulation of other new and emerging technologies.